A little over two years ago, the founder of Chariot, a company I was involved very early with, told me about another founder in his YC batch that he liked. He wasn’t sure if it was a good business (at the time), but he really vouched for the founder, and so in February 2015, we met for breakfast in Palo Alto. I went into the meeting thinking I wouldn’t invest, and left the meeting feeling the same way, though I really liked Sam. As he was a friend of Ali’s, I offered to informally help and just get to know him.
A few weeks passed and we met again a few times, and I ultimately decided that, “why not?” and so I cut a small check into what was then called “TransitMix.” I remember being at home after wiring the funds and cruising around Sam Hashemi’s personal site and thinking, after getting lost cruising around his site for a good 30 minutes — I didn’t invest enough!
What I didn’t realize in meeting Sam initially or getting to know him early is that he is truly a genius product designer. Take a look at his portfolio and see for yourself: http://www.samhashemi.com/work/; and check out the company where he is CEO is now called Remix: https://www.remix.com/
Since writing that smaller seed check into Remix (and, boy, do I wish I could’ve had a bigger fund to write a bigger check), the company has quietly ramped up SaaS revenue at a rate I have yet to see in my young portfolio. Every quarter, Sam sends an investor update that starts with metrics and the phrase “New Quarterly ARR.” I love that. Sam has really grown as an executive since I met him, now leading cross-functional teams and building what could be a truly global company.
Finally, Remix is in a space traditionally shunned by traditional VCs. Selling to government entities isn’t quite as sexy as an enterprise-wide deployment. Yet, we all must feel in some way that traditional enterprise SaaS solutions are saturated, but that “hidden markets” like state and municipal governments exist and are quite huge. It’s a perfect time for software to flow like water into these new arenas. I have made a number of seed investments against this thesis, and they are starting to attract traditional venture dollars because those who know see the market opening. Stay tuned for more on this topic.
As we have done in the past before, Keith Rabois made time to share his thoughts on how tech and society at large may be altered with the new Administration which assumed office this week. While I don’t always agree with Keith, having read his perspectives for years now, he is more often right about things and quite frequently. We also share a personal interest in observing politics (from different sides of the spectrum), so we got together a day before the inauguration and recorded a conversation on a range of topics. Below is an edited, partial transcript of our discussion. The opinions expressed here belong to each individual only.
Introduction and Personal Biases
@semil: Keith has always been great at making time. So, let’s see January 18th, two days before the inauguration. @rabois: It’s crazy. Isn’t it? @semil: It’s crazy. I wanted to dive into a lot of topics. As brief context, you were an early supporter of Ted Cruz. You were classmate to Ted Cruz. @rabois: I actually I didn’t support Ted. I was a classmate in law school. Actually, technically a supporter of Scott Walker, which shows how well our predictions and endorsements, how far they go. But, I didn’t endorse anybody after that. @semil: Got it. I want to be clear about my biases too. This is difficult topic for many people. From my point of view, my bias is that I would’ve wanted the Democrats to win. But I completely understand how this happened and we’ll try as best as we can to take an apolitical approach here and focus more on analysis.
On Retaliation Toward Tech
@semil: The number one thing to kick off with, and you mentioned this in the conversation you had with Emily Chang (on Bloomberg) a little bit: given the personality of the new Commander-in-chief – and this sort of harkens back to how Nixon was – and given the tenor of the attack from, let’s say, Silicon Valley/tech and entrepreneurship – that includes investors, executives, founders – should people be on alert for some type of retribution or some type of retaliation? @rabois: Most of the large companies post the election results have changed their tenor, changed their attitude. They are trying to dial back the ledge that they walked over. I think it is very difficult as a public and traded company to take up a partisan position, and most mature industries don’t in fact. For example, Wall Street gives lots of money to Democrats. Wall Street doesn’t probably love the fact that Democrats tend to regulate Wall Street and, all of a sudden to deregulate it, but they are very careful to not to get themselves in the middle of the bull’s eye. And I think Silicon Valley, being kind of a newish, more recent power, hasn’t realized the consequences of being wrong, and being partisan. @semil: At a time when we have Twitter, Facebook, and everything is now semi-public. @rabois: The contributions were public and have been public for a long time, but the attitude of employees, the bigger… the “___ Trump” homepage. You just can’t do stuff like that and not pay consequences when the other party particularly controls both sides – in the Congress, House, Senate and the President – and so everybody is reacting from Jeff Bezos to Eric Schmidt. They are all trying to become friends.
On Peter Thiel
@rabois: One of my friends said to me that, in many ways, Peter Thiel saved technology, because had Peter not been a Trump supporter, and had he not shown that there is at least some diversity of views in Silicon Valley about politics, I think the desire, the President being somewhat vindictive just from purely public statements and attitudes, and the traditional views of the Republican party, I think given the contribution level, given the expressed outrage, absent Peter’s intervention, I think technology would have a real problem right now. @semil: And do you think Peter is like a bridge? @rabois: Well, he’s up on the bridge as you saw sort of famously with this tech meeting that Recode has been covering substantially and vigorously. But, the reality is there’s very few people in technology with access to what would seem to be the President of the United States. Most companies want that access. The larger the company, the more they want the access across multiple verticals: financial services, healthcare obviously.
Peter made one of the great asymmetric bets in history. If you think about this from a classic, venture, startup perspective; everybody thought he was crazy and wrong and it turned out he was right. That’s a good incentive and accumulates to a lot of money, accumulate to a lot of power. This is actually a metaphor for what happened. I occasionally get accused of being part of the PayPal mafia, and people sometimes forget the history of PayPal. All the people that worked at PayPal were complete misfits and had no establishment contacts to Silicon Valley whatsoever. Yet in about from five years from 2002 to 2007, we went to become central casting in Silicon Valley, and almost accused of being the establishment. What happened was in 2003, 2004, 2005, nobody thought that there was another wave of technology innovation coming, because there was a nuclear winter in Silicon Valley, and particularly on the consumer side.
All founders who needed money sort of gravitated to Peter, Reid Hoffman, and to some extent, Sequoia and people like me, and it turns out there was another way. Some of our best turned out to be pretty good. We moved from outliers to central sort of central force in two to three years.
Peter’s bet on Trump has made him from an outlier in politics to a very central force in politics overnight. Now, he has to decide how to use that, how to leverage that, and see what happens. But it could have the same dynamic where Peter becomes a top one, two, three, four, player in politics just like he has been in technology. @semil: Do you see him having ambitions on an elected official basis or on a more appointed position basis? @rabois: I think he cares about influencing specific policies, and the question will be can he do that from afar or not. A lot of people have the desire to do that from afar for lots of great reasons. It’s very, very, difficult to do that. In practice, it doesn’t work so well.
When you become President of the United States, there are so many bubbles that get created around you. Some of it’s security bubbles, some of it’s a political bubble where people try to crowd out other people. So, it’s really difficult to influence the President from afar.
So, I think at some point he may have to think about taking a more active role. For now, I suspect he’ll try to influence from afar and by placing the right people in the right places.
Fighting Words From Tech Incumbents vs Tech CEOs
@semil: Do you think there’s a difference when it comes to talking publicly about politics between the Bezos’, Eric Schmidts of the world, or sort of large tech incumbents versus the startups and the VCs that back them? @rabois: Startups can clearly be more reckless. I mean, startups are like Pirates, and the Apples and Googles are like the Navy. For startups, nobody really cares, for the most part, what the attitudes of the founders are and whether they endorse a particular candidate. But as a publicly-traded entity, you just can’t be partisan and expect to be a publicly-traded entity. You have shareholders.
Mark Zuckerberg at Facebook actually handled it very well when there was alleged controversy around Peter. He said, “Look we want to be a company that has a product that is used by billions of people. If we are going to be used by literally billions of people, we can’t alienate half of the United States. That makes no sense whatsoever.” So, I think he and Facebook probably navigated a very complicated morass quite well.
On The Tech Sector as a “Boogeyman”
@semil: I’ve read this narrative– I personally disagree with it, but I wanted to get your view which is, “The tech industry, either at large, or the startup industry – since there’s such a concentration of wealth here – will turn into kind of a bogeyman or a target as well.” I tend to think of tech as more aspirational and people use the product and services on a daily basis, but do you think that that negative narrative could increase or grow during a new administration? @rabois: It could, but I don’t really believe in the narrative. The evidence is against the narrative. For example, when I travel back to high school where I grew up, which is very far removed from technology, people really want to be in technology and are really interested in what I do, and how to find routes for actually now outpace their kids, which is a little embarrassing of using in technology. I’m dating myself badly here. Secondarily, I’ve seen public studies of sort of different industry reputations, and tech is always the number one or two most highly-regarded industry in the world. So, it depends compared to what? And tech is not perfect. Tech has lots of flaws. But when you compare human endeavors to other human endeavors, to other human endeavors, tech stocks up by any metric quite well.
On Entrepreneurial Responses To A Trump Administration
@semil: Do you think that there’s any room or place or… requirement isn’t the right word, but obligation for entrepreneurs or companies to either be part of the next wave coming up, or building products and services to either amplify or combat policy that they don’t like? @rabois: Absolutely. One of the things that we do here at Khosla Ventures is we filter all our investments by impact. There are lots of things that can make money that we don’t invest in, or aren’t interested in, and then when we find something that we think has potential high impact on society, in a positive direction, we are more likely to invest. So, it’s absolutely the right and positive thing for people to build companies that are sort of the change they want to see in the world. I think it’s also… one interesting thing about Trump winning is I think it will encourage more political behavior, more activity by non-professional politicians. So, I think more Silicon Valley people may run for office, more technology entrepreneurs may run for office, because it’s now established that it’s at least possible for someone who hasn’t spent his or her life in politics to be extremely successful. I think that will encourage more people to run for different levels of office – whether it’s the House, the Senate, the Governor or President – and I think that’s a great thing, to have more talented people, from more diverse set of backgrounds, running for office than 40 years in politics.
On Fake News
@semil: What’s your point of view on the fake news debate? There’s a debate around Facebook and news, and then just generally around filter bubbles. And what could entrepreneurs do to fix that if it is a problem? One of the issues I am finding is we think of incumbent companies as “you can disrupt them.” The issue with the incumbent companies that are built on top of the Internet or mobile networks is the network effects kick in, and they seemingly get stronger, and you have the founders either in control or close by. So, what can people do? Clearly we have free will to pick and choose where we get our media from, but that’s probably not the case of where people are going. @rabois: I’m skeptical about this fake news debate for two reasons: One, I’ve seen no evidence that any voters in the United States are less informed than they were in any prior election in the American history. I’d like to see some comparative data that shows there’s been some decline in knowledge about the world, knowledge about policies, knowledge about candidates, and there’s none of that evidence. Two, I think that this is mostly the last gasp of the traditional media trying to reinsert themselves as a gatekeeper. Basically, what the Internet does classically across all industries is it eliminates gatekeepers, and you eliminate gatekeepers and get a wider array of opinions. Some of those opinions actually may thrive, that the gatekeepers would have filtered.
Naval [Ravikant] posted quite elegantly about this. I have read all the Startup Boy blogs about politics – they are incredible – and so I think that’s just one of the bigger drivers, the people complaining about fake news or all mass media types, not normal people. Then, the third is I think it’s a hard problem. I think you can discriminate between hoaxes and what I’d call hyper-partisan behavior.
Hoaxes are easier to filter, easier to eliminate, although people still buy the National Enquirer. There’s demand. That’s another point, that throughout history, the National Enquirer has been publishing fake news, hoaxes, for decades and it’s sort of unpopular.
We’ve had wars based upon fake news intentionally. If you take the American history, you learn about the Spanish-American War and how the first newspaper publication sort of manufactured the conflict. So, this is nothing new as far as I am concerned, but I think there is a way to eliminate intentional hoaxes versus my interpretation of facts that leads me to a conclusion, that may or may not be “true.” I think that is a problem and technology companies want to stop that.
@semil: Do you expect deregulation and do you expect it in a couple of industries, or literally are we looking at all of them and thinking about them? @rabois: I’m a conservative. I would wish we would deregulate and relook at regulations across all industries. I doubt that will happen. I think it will be concentrated in a couple of verticals mostly driven by a very senior leader in the government who wants to take on the agenda in that vertical. I think it’s generally good for startups. Startup’s thrive on chaos, unpredictability, and flux in the system. And so when you do regulate something, it creates a lot of uncertainty, which maybe be bad for society, or difficult for society at large – and incumbents have challenges with that – but it’s a great opportunity for a new company to take advantages of the tectonic plates shifting.
On Reexamining Everything With Fresh Eyes
@semil: It seems like the incoming administration’s brand is to say “unconventional rule-breaking got us here,” and so it is probably a license to look at everything with fresh eyes. @rabois: I think there is a license to look at things with fresh eyes and you can see some of the appointments the administration is making clearly reflect that. Some are a little bit more traditional. @semil: Any ones that you would mark as traditional versus like a revisiting? @rabois: Well I think the… for better or for worse, the Secretary of Education, the Administrator of the EPA, are examples of an attempt energy, possibly, examples to rethink from first principles, which will be interesting to see how that plays out I suspect the SEC is a pretty traditional appointee. So, it varies. I think in foreign policy, nobody really knows. I think there’s conflict among several of the senior people that are on the foreign policy team. So, how that plays out and how… @semil: That will be a Netflix show. @rabois: Yeah, and how the president arbitrates those disputes because they have very different views. I just was watching the new UN ambassador’s testimony this morning, which in my opinion is perfect and awesome, but she disagrees with several other people, including the President, on several things. So, that would be an interesting sort of administration to watch.
I think it’s healthy that he has hired effectively a diverse set of views. So, take Russia for example. Lots of people on his staff think Russia is evil. Other people think Russia is a great ally and should be trusted, and will be a great counterweight to China.
Those are pretty different views, and I think it’s a smart thing to have a divergent set of views in the Cabinet, but someone is ultimately going to have to make a decision because the rubber will meet the road at the policy level at some point.
On Impact of Social Media on Domestic & Foreign Policy
@semil: On this idea or license to rethink from first principles – let’s say the EPA or any other agency – what has enabled us to go from within a 40-year period of building up and trusting institutions all the way to today, in what seems like erosion of that trust and a license to question all of that. How did that happen so quickly? @rabois: Social media has played a lot of a role now, particularly Twitter, in allowing people who want to critique the establishment, giving them a platform and an opportunity to develop an audience, and not have to run through people who have filters. The filters tend to take that stuff out. Filters tend to eliminate critiques of the establishment, and those filters are gone. Whether you use Twitter, or whether you use Facebook, or whether you use Reddit, which are really the three major choices. All of those have a lot of people with new ideas, new data, to publish “them” and distribute them, and attract a following, and that changes the debate.
You’re going to see this for better or for worse. I think in some areas it will turn out really well, that we’ve rethought policies from the first principle. For example, two of my own pet peeves, I have never thought the One China policy makes any sense. However, the foreign policy establishment within the United States has made it impossible for 40 years to revisit that conversation, and then one day Trump woke up, made a phone call, or returned a phone call, and started tweeting about it. And that’s changed 40 to 50 years of American foreign policy, which I think has been for the better. Or two, Trump is proposing to move the US embassy in Israel. That’s fundamentally changing the American foreign policy since the mid 1980s, which was the position, and I think that’s a good thing from my perspective.
On How This “Change” Will Feel
@rabois: There’s a lot of positive examples of rethinking things. The President-Elect is probably more like a bulldozer, and maybe a bulldozer without a refined GPS, and it depends on what you think of the general terrain. If you love the general terrain, he’s going to bulldoze over some things people like. If you don’t think the general terrain is safe or secure or prosperous, then it’s going to be great to have this bulldozer. Because when you bulldoze, who knows what plants are going to emerge? Some of them might be awesome crops. It’s going to depend upon your pre-existing views about the general status of the United States, and general policies, whether you like Trump or not. @semil: And if this wave continues, whether Trump is leading it or not over an eight-year period, the effects of that will be felt like over the rest of everyone’s business lifetime who is watching this. @rabois: Absolutely. The consequences are sometimes hard to tell in the short term. Things that look crazy or wrong in the short term turned out to be brilliant, and things that look smart sometimes look disastrous. The classic example that everybody is familiar with is, the government gives us all this advice about what food to eat. It’s basically been wrong for 30 or 40 years, and had you ignored the government’s advice on food, you’d probably be better off, than worse off. That’s why we have all these obese Americans, as people actually listen to the government. Government policy can be terrible for society and it may take 10, 20, 30, 40 years to see that. Sometimes government policy that’s wrong at the time, in short term, may look to be brilliant later. @semil: And it will obviously affect people at different generations, at different times, right? So, it can seem unfair in the beginning and then sort of, in some cases, gets better or worse overtime.
@rabois: [Healthcare] is a pretty popular topic. Everybody has an opinion on it. But fundamentally, whether you like Obamacare or not, there are some structural problems with healthcare in the United States. Certainly not ideal. They’re certainly better things that we can be investing in that will lead to better lifespans, better outcomes for lots of people. At some point, the American people and the American politicians are going to have to address some of the root causes. So whether repealing Obamacare makes things worse in the short term is part of the question because, obviously, people care about their health care. But the question is: What happens in 2 years, 4 years, 6 years, 10 years? If things got worse for 2 years, but we are fundamentally on a solid plane for the rest of my life, that might be better.
So, there’s these short-term and long-term trade-offs, and then you layer that all out in politics, which is there are voters who care more about different time dimensions. @semil: And the branding of what policies are in place. @rabois: Yeah. Exactly. So, there’s multiple variables.
Obamacare and Replacements
@semil: In the immediate term, to get micro for a second, what do you think the Congress will do in terms of the desire to, let’s say, “repeal Obamacare”, but then have something in place? What will happen with that? @rabois: Well, I think they are kind of stuck in this crazy box, which is a function of procedural rules, as I was kind of Tweeting about a couple of weeks ago. It’s easy to repeal Obamacare because there’s a way to do that with only 51 votes in the Senate, and there’s not a way to create a new Obamacare. A replacement with only 50 votes, you need probably 60. So, the structural desire to repeal and replace almost can’t be done in one step, which creates this perversity of the only structural way, like procedural way, to do this is may be to have to do a repeal first, without being able to replace technically. But the uncertainty of that to people, to the market, may be too dramatic for people to handle, so the Republicans may need to rethink how to do that, and how to do something that could get 60 votes, or somehow survive a filibuster at the Senate. It’s a very complicated challenge there, because of the filibuster rule that’s still possible.
@semil: Let’s move on to probably the most emotionally-contested issue, which I would say is around immigration. Obviously, in the campaign, a lot of stuff was said that is frankly crazy and scared a lot of people. What are we going to see now with Sessions in place? What should people expect? Will it be more along the lines of people wanting to follow rule of law and saying like everyone needs to be through a system? Or could it go over into another extreme? @rabois: I have a counter-intuitive sort of point of view on this – is I actually think that for skilled workers, H1B, traditional immigrants, it’s going to get easier and not harder. Then for unskilled workers, it’s going to get harder and not easier. @semil: Which is what happens in a lot of other advanced countries. @rabois: Actually…right. There’s also a logic to that. President Obama, for his own political reasons, linked the two together, and that’s why the term was called Comprehensive Immigration Reform. And his base, the Democrats in power, would not allow any of liberalization of H1B visas without linking it to unskilled labor, particularly from Mexico. So, he insisted it’s all or nothing, and that’s why he got close to it. He actually got close to getting all, but wind up with nothing because of that insistence on linking the two things.
Republicans are going to delink those two things. They’ve always had the votes. The Republicans in DC have always had the votes to liberalize H1B visas and there’s a lot of Democrats who would support that. I think it’s possible that we see America becomes a shining city on a hill, where if you are talented and you have degrees, technical degrees particularly, it’s easier to get into United States legally, but otherwise it’s going to become more difficult.
Even Trump in some comments made his point, which is it is insane that we allow people to come here to get graduate degrees at Stanford, down the street, in CS, in Electrical Engineering, and then we kick them out of the country. That makes no sense whatsoever. @semil: Should we expect a likelihood that the INS is one of the places that’s going to be rethought. @rabois: Agencies have different latitudes set by the Congress of filling in the gaps. It’s not clear to me that the INS has a lot of latitude, versus like the Department of Justice, versus the President, and versus the Congress. A lot of these caps are set by congressional action. So, some agencies, like the SEC, famously has incredible discretion. Insider trading has never been defined by the Congress. So, the SEC gets to try to define it, subject it to a lot of court review, but they’ve been given a wide latitude to do what they want. Whereas the INS, I don’t think has nearly as much latitude. @semil: So in terms of potential financial regulation, the SEC may have more powers vis-a-vis Congress and the executive branch, but when it comes to immigration, it’s actually flipped ? @rabois: I think it’s been flipped. Obama has done a lot by executive action. Conservatives, at least, have been very critical of that. So, how that plays out in the Trump administration, whether Conservatives or Republicans support the use of executive action, which they had been very critical of, if they are not hypocritical, they really shouldn’t be having the President set immigration policy directly.
New Administration and The Media
@semil: Let’s look at the new Administration’s relationship with the press at large. So, traditional incumbent media and sort of the BuzzFeeds of the world, and the next BuzzFeed. The Cheddars of the world… @rabois: I don’t have that much to add to it, we need to see it play out. It’s very clear that the President understands that the media is not necessarily his friend, and I think the more disruptive you are as a President, the more adversarial the media is going to be, particularly if you’re Conservative. I mean, there’s lots of studies that show how biased the people who go into mainstream media are, and they cover things disproportionately from a Democratic perspective, but it does appear very clearly that Trump is not going to take this like sitting down. He’s going to punch back. I think one of the things that fueled the rise of Trump was actually more Conservative people saying, “We want someone to punch back for us because nobody is supporting us. Nobody is defending us against attacks from the liberal media.” The best articulation of this that I read in summer of 2015, not ’16, was in the Atlantic of all places. And Trump has the personality to be a fighter, and he’s going to push back on the people that are critiquing him, and that no one knows how it’s going to play out. @semil: And he has nothing to lose now. @rabois: Well, he does. I mean, as you become President, you have social capital, like your political capital. As you expend political capital, it may get depleted. Now if you expend it wisely, it may get increased just like social capital does. So, it’s not like he has some inherent, unalienable ability to do this. It depends on how he uses it, against who does he use it. Lady Thatcher had a bit of this dynamic. She’s obviously very different from Donald Trump, but in many ways, her relationship with a lot of the media in the UK was similar, and her willingness to ignore the media, or push back on the media, was roughly comparable, at least the closest proxy I can think of in my lifetime among the major democratically-elected leaders.
On NATO and Foreign Entanglements
@semil: Regarding foreign policy: One of the things that’s being rethought from first principles is NATO, and other entanglements or obligations that the country has. What should we expect vis-a-vis NATO and in Europe? How could that play out and what are the potential upsides of that and also the potential risks? @rabois: I do you think you see a distancing of the US from continental Europe. It depends a little bit on the election. So, France is going through a major election this year where it is possible that a true Conservative, Reaganist kind of a Republican-type person gets elected, which will radically shift French politics. So, that might create a realignment. Germany is going to go through an election that’s going to be quite contentious. @semil: Europe also seems to have a lot of structural economic issues that have been sitting there for years. @rabois: They have been simmering and the EU has masked some of this. They have structural economic issues. Nobody in Europe basically grows. None of those economies grow. @semil: They have huge unemployment. @rabois: Yes, unemployment particularly among [young] people. Then you have this immigration and the associated risk of terrorism, and things like that, and insecurity. Then you have in some parts of Europe a vibrant anti-Semitism that has to be confronted as well.
So, you have serious fundamental problems. It’s not an easy job for anybody. Generally, European economies are heavily-regulated, heavily-taxed. A lot of growth in that dynamic where people are unemployed, and there’s a lot of union power, at least in some of the markets. It’s going to be very challenging. And so I expect a distancing of the US from Europe as they sort out the mess, and the countries in Europe sort out their messes in the US-favorable way, which France probably will. Who knows what happens in Germany? That might lead to some shuffling of the deck. I think our relationship in the UK are probably pretty strong, and so hard to tell how this plays out.
On Globalization’s Future
@semil: Does globalization continue to thrive in the same way it has? @rabois: No. One of the things that people got wrong is everybody assumed it would. This is a classic Peter Thielen point, and I certainly wasn’t aware of this either. Everybody for the last decade or so assumed that we are in this inexorable trend towards globalization, and it looks like that may be false. Everybody just assumed the world is increasingly interdependent, increasingly globalized. There’s just one arc of history and that’s where we are going. For the last 15 years. Almost nobody would take the opposite view. It’s only about the last two years that many people, from economic commentators to conservative leaders, to liberal leaders, like very left-wing leaders, have been taking that view, and it’s seems like there’s a trend against globalization and interdependence. That may be one of the bigger mistakes in history. I think Peter got it right. I think Peter picked up on this a long time ago, but I don’t know too many people that are arguing this more than six to nine months ago. @semil: If you’re right in that started a reverse or sort of unravel two years ago, what do the next 5 or 10 years look like if that pace continues? @rabois: I think it’s somewhat contrary in perspective. I think it depends upon old school factors, like what’s the natural resources that are particular to our economy. So, countries that have a lot of self-resiliency and potential self-resiliency may do fine. Countries that depend upon an intricate wave of networking and trade may suffer a bit. But generally, globalization has been good. If you believe in comparative advantage and all these things you learn in ECON 101, globalization is good for everybody. I think that’s mostly right. But moving towards a homogeneous future is clearly going to be wrong. @semil: When you combine the pace of globalization that went on plus the shifting value to knowledge work, and work with certain types of machines, it left a lot of people behind, and those people vote. @rabois: Those people do vote and it’s conflating several things. For example, one can be pretty pro-globalization, and still think China is cheating. You can stitch together different views. For example, I think we should probably be a little bit more tough on China in some of the things they do, but I’m still, generally as a person, pretty globalist. Other powers are clearly is manipulating many markets in attempting to take advantage of power vacuums and we’re doing nothing about it.
On World Superpowers
@semil: Are we potentially entering an area of a tripolar world where you have U.S, Russia, China? @rabois: China definitely. Russia is a debatable proposition. It’s not clear that they’re an economic superpower. They’re a historical power, they’re a landmass power, and their population is a power. But it’s not clear that they can get in economic competition with anybody – like China and the United States – and produce things of value, at scale, in a way that leads to long-term power.
You can make a case that Russia is playing the political game very well, Putin’s playing his chess pieces quite astutely. But today, they have no long-term future on this level. @semil: That may also be a clue as to where he focuses. @rabois: Absolutely. As I said, he’s playing chess pieces quite astutely. He doesn’t have a lot of great chess pieces, but he’s playing them better than anybody else at the moment. I’m not sure that Russia can be a superpower, other than by political manipulation. The underlying, fundamental engine of that country just isn’t on the same scale in any dimension as the United States or China. @semil: I’m thinking we might see some aggression. @rabois: Potentially. What do declining superpowers often do when their economic engine isn’t capable of keeping up with the true superpowers? War and aggression is the more classic moods. They also get more and more desperate, and they do things that are riskier.
So, it could be a pretty precarious and dangerous situation, but I just don’t think over the next 10, 20, 30, 40 years you can make a case that Russia can keep up with the United States, or China, absent some artificial sort of sweeteners.
On Election Hacking
@semil: Let’s talk about this idea, and it leads back to tech that there was interference with the US election 2016. I know that there’s been interference across many other elections, historically, but this time it turned into more of a political issue. This has been one of the issues, for me, where I feel like I keep up pretty well with the news, but I can’t follow a piece of this. I’m totally lost. I’m waiting for the Wikipedia entry in two years. Walk us through what would you’ve read and what you think has happened, and what the implications are 1) for the US as a country, in terms of its own cyber security defenses, and also what tech incumbents and startups can do as an opportunity around that? @rabois: Sure. Cyber security is a great area for technology innovation. We have like three or four companies in our portfolio. The most prominent is called Cylance in LA, doing extremely well.
More and more companies will invest more and more money in protecting themselves against emerging threats. We have an interesting and innovative one called PatternX, it’s like artificial intelligence-based. There’s going to be a lot of innovation in this area. I mean, it’s just a good and costly thing for VCs to invest in. It’s a great thing for Silicon Valley to compete on.
The actual election, I have a somewhat nuanced view: to me, this isn’t anything new. I think this is what political enemies do, they attempt to influence outcomes in countries they’re hostile to. The only difference was the Obama administration, for whatever set of reasons, would never admit that Russia and Putin were potential enemies. They didn’t treat Russia like a potential threat, like which Romney and others warned about – Senator Rubio as well – and so they were surprised and shocked that a friend would do something like this.
Whereas if this had been in the middle of the Cold War, nobody would have been surprised or shocked, if using propaganda or other means, the Soviet Union was attempting to influence outcomes here, or vice versa. I mean, we had Radio Free Europe broadcasting into the Soviet Union. Our propaganda, it turned out to be true propaganda, but propaganda. @semil: My bias is I’m an Obama fan. I can’t understand how he didn’t inform people. Because it seems like at a certain point, a part of the job is to just inform people of what you’re hearing. My calculus is maybe everyone thought Hillary would win. @rabois: There’s probably some truth to the Hillary’s-going-to-win kind of attitude, but I think it’s more ideological in the sense of not really believing that Russia’s the enemy. You saw his famous clip [of Obama] against Romney, which is “The ’80s called, they want their foreign policy back.” He just doesn’t understand at all that there’s hostile enemies in the world to the United States. He keeps, across every dimension, repeating every mistake in the Jimmy Carter administration. I saw Senator McCain said that exactly this morning, which is funny because I did Tweeted it a few months ago. I’m glad that he’s using my thoughts pulse. @semil: He’s probably got you on his Twitter list. @rabois: Yeah. He’s got my talking plates down.
Obama, for whatever he’s done in American domestic policy, and whatever positive examples he’s set – I think he set several people will remember for a long time – on foreign policy, unmitigated disaster period. No exceptions.
On Cybersecurity Opportunities
@semil: On cyber security and technology, will we just see a ramp up of vertical security funds, people moving into security, as a new area? @rabois: I don’t know about vertical funds because, as you know, from raising funds and researching that stuff, it’s hard to move on a dime. It’s hard to create funds from scratch, move, and all of a sudden start being in business. I do think there’ll make an emphasis on it.
I’ve mentioned that one of my goals for this year is to help start or jump start a new company. One area, probably the single area I’m most interested in, is in cyber security and I’m actively working on something in that area right now, and trying to pull together some pieces.
So, I think you’ll see a lot of, and I’m not a historically cyber security person, I just think that there’s a clear set of opportunities, a clear set of DNA and skills, that should combine together at the right time, the right place, and so I’ll apply these. I’ll be spending a lot of time personally on that this year. But, I think you’ll see a lot of lot that opportunistic investing, opportunist founding.
On Bringing Jobs Back
@semil: I hate using these buzzwords, but I have to. The combination of robotics and automation that drives it are going to take a lot of jobs away. I think this month already, and we’re about halfway through, I got three pitches for really talented robotics engineers trying to do something in agriculture, all different models. You could just see it coming. We have really smart people working on it. Part of the campaign that put the new administration in power was sort of on bringing jobs back. That was a marketing message. What’s going to be the reality over the next five, 10 years? @rabois: We’re clearly going to be seeing increasing use of robotics in agriculture and in other fields. What’s not obvious is what the sort of second-order effects are, with a dynamics system or static analysis, which is just… I mean, you know, Marc Andreessen when he’s Tweeting would always Tweet these graphs, which show, at least historically, every time there’s been a massive industrial movement it’s created more jobs net, than have been sacrificed.
Now, that doesn’t mean in a compressed period time, like in the first month or first year. But overall, technology has empowered people and create better and higher-paying jobs through every sort of epic of history. Maybe this is different, maybe it’s not. I think you can debate that, but it’s not as superficially obvious as, “Tech’s going to replace jobs. Hence, there are no jobs. Hence, everybody gets paid less.” I think that’s probably the wrong narrative. @semil: You’re saying that there’ll probably be a transition. There’ll probably be new jobs emerging that we don’t know of yet, and that in any sort of change, which has been kind of a theme in our conversations, there’s going to be a lot of people that don’t like it because of the inherent uncertainty in it> @rabois: It certainly is an interesting dynamic. Fundamentally, when you have uncertainty, you get the worst of all across bridges. You have people who fear the change – because they’re happy or satisfied where they are – and yet you don’t yet see the benefits. So, there’s few supporters and a lot of enemies.
Whereas, let’s take a different one that’s going to play out probably differently: self-driving cars. Self-driving cars are interesting because people can immediately grok the potential benefits. A lot of times, we see flux in innovation, that the pool of people that see the benefits can realize it, that want it, that demand it, and crave it, is pretty small. So, you have all the old people voting against it and not enough new people.
Self-driving cars. Because 40,000 people die every year. Because driving is a pain in the ass. Because driving is wasted time. All these reasons that causes traffic, and all this stuff. Fundamentally, cars are expensive. Whatever the case is, people don’t like their cars and would love to have self-driving cars emerge. A lot of people.
So, there’s people on the positive side championing more than you usually see for a type of breakthrough. So I think self-driving cars almost surely do emerge and I think because the regulatory structure where it’s possible to innovate in some states, but not all states, get evidence of the decrease in drunk driving, get evidence in the decreasing death. Then, other states will have to keep up once the evidence is clear. @semil: The argument people use there is if you extrapolate out to different sorts of automobiles, that you’ll end up with trucking. @rabois: Yeah. @semil: And that turns into a political issue. @rabois: I think it does because trucking is still very large. I mean, there’s this analysis that suggests that in 30 somewhat states trucking is still the largest profession. It seems very counterintuitive to people who live in Silicon Valley, I admit. But 2) I think trucking is right for quick innovation. Whereas there’s usually two drivers, I think you will see as one driver, one machine, and that cuts the job. Now, that said trucking is suffering a recruiting shortage at the moment. @semil: It’s one of the toughest jobs. @rabois: It’s a tough job for obvious reasons. But if you look at the new people becoming truckers, it actually has slowed down significantly. So there is like a drivers shortage kind of bubbling up anyway and that may modulate the effects of this transition. Yes, there’s a lot of truckers. Yes, some of them will potentially be exposed. But there’s not a lot of new people that want to be truckers and so the ability to ship things is dependent upon new truckers emerging, and they’re not emerging.
Some Predictions and Democrats’ Future
@semil: Okay. Let’s move into some more personal predictions. Let’s see here. Okay, two-term president barring any health issues. Two-term president. @rabois: Wow. @semil: Can the Democrats… I mean, this is a separate question. Can the Democrats find someone to counter in this short period of time? @rabois: Well, they get a 2-year pass, so you don’t really need to know until after 2018. That’s a long time politics and the dynamics will be different, and Trump will often run on his record. Right? To some extent, the dynamics of re-election are a little bit different, is you’ll have to have at least some key accomplishments. You may have some negatives, but you have to have some key accomplishments. That’s something pretty important. Usually, the reelection is mostly a referendum on the current President, not the alternative candidate. That said, the Democrats have an age issue, which occasionally I will re-Tweet about usually, is all the leaders in that party are ancient. When I mean ancient, I mean they’re in their 70s or 80s, and it’s not clear who the next generation is or could be. Whereas at least on the Republican side, obviously Trump is 74 or whatever he is – or 69 or 70, whatever he is – but most of the leaders in the congressional branch, and the House and Senate, are quite young, like 40s and early 50s. So, there’s like a bench. @semil: If you wind the clock back a year, I think there are few sins in the Democrats, in terms of strategy, but not having a deep bench thought that they could unify very quickly. The problem was they unified around the wrong candidate in that sense. Whereas the Republicans had a very deep bench where people thought it was going to get ripped apart. @rabois: Yeah. Well, 17 people ran for the Republican nomination. We make fun of them, and lots of people make fun of them now, but on paper, the credentials of the 17 people running were quite impressive. You’re talking about Governors from Texas, from New York, from Illinois, from even Michigan, from every like large state you could imagine.
The Republicans had an interesting field. Most who are up and coming, meaning in their 40s and 50s that were running on the Republican side, but it was a pretty vibrant competition. Trump to his credit, and people underestimate this, has managed to destroy the elites in the Republican Party and the Democratic Party at the same time. That’s precisely whether you think it’s good or bad. It’s incredibly oppressive for one person to literally destroy 17 people on the Republican side and then go over into the other party and win too. That’s a shocking disruption in some ways. But I think the Democrats have a bench problem. But they have another two years to kind of figure that out. I mean right now, their initial reaction to losing hasn’t been incredibly invigorating, but I don’t think they’re on the clock yet until 2018. In 2018, we’ll then start the clock and we’ll see what kind of person is the right antidote to Trump. But he’s going to have to accomplish some things. Otherwise, almost any Democrat can beat him if he accomplishes nothing.
Most Promising and Most Troubling
@semil: What about for you, what seems the most promising to you in terms of the change that’s going to come, and the most troubling? If you had to isolate one on each. @rabois: The most promising is one or two things that I already sort of alluded to. One is that I feel friends around me who want to get more engaged in politics, maybe actually even be willing to run for office, and I think that’s very liberating that people no longer believe that unless they devote their entire life in the time they’re 28 to 50, to politics, that they can’t run for office. So, I think that’s an incredible development that Trump has fueled. The second thing is, I think, rethinking first principles, at least, in some dimensions. There’s just sort of a lot of corrosive accumulation of debt, intellectual debt, that sort of accumulated over the years in politics. Trump, for better or for worse, sometimes not even knowing why, is sort of unlocking new thinking and new opportunities there, and some of that might turn out to be a very good thing. @semil: What’s most troubling to you about the change that could come? @rabois: Well, I think it is a little reckless in some cases. For example; one thing – and a little detail that not anybody will know – is generally when the President of the United States speaks on foreign policy, there’s a separate approval process for his or her speeches that it goes through, compared to a domestic policy speech. The whole point of that is to make sure the President doesn’t accidentally say the wrong thing. There’s, in fact, a different speechwriter that usually works on it, but also there’s a speechwriter who is classified with national security clearance, and then there’s an approval process that’s totally different than when you give a domestic speech. So, it’s very easy to make a mistake, like the wrong word, the wrong word translated in the wrong way, causes problems. Clearly, Trump is going to be Tweeting, and so I doubt those Tweets are getting the same level… @semil: Is that convention or is that law? @rabois: It’s convention, but it’s done for… not every convention’s bad. Silicon Valley, right? A lot of conventions are bad and dumb, and that’s what we get paid for doing. @semil: Part of the reason I was asking for that clarification is I asked a bunch of friends on Facebook… again, to be clear, I was not voting for Trump, but I was trying to assess during the campaign what things in the campaign did his sort of campaign did that were illegal, and I couldn’t find. @rabois: Yeah, I don’t know that. @semil: All of it was like challenging conventions, right? @rabois: Yeah. He’s challenging convention, but not all convention is bad. I mean, we get paid in Silicon Valley for exposing convention, change of convention. But just like to be reckless to rebuild every part of a company, from scratch, and so in the Valley like none of us would counsel our founders to rethink every part of building a company. I think rethinking everything and changing every convention, and disregarding them all might also be dangerous too, but you want the upside. Even the upside is some of the recklessness leads to revolution, and revolution can be powerful and empowering.
On Carried Interest
@semil: Sort of a nominal issue compared to things we’ve been talking about. What about this idea around carried interest and what will happen? I don’t really follow that. @rabois: The carried interest debate is fundamentally around whether the carry that VCs get, which is the compensation that’s a huge fraction of our job is taxes, long-term capital gains, or regular income. It’s historically been taxed as long-term capital gains and that’s allegedly fueled the entire industry of venture capital. There has been both Trump and Hillary Clinton brand on campaign that they would eliminate this alleged loophole. It’s not really a loophole because it potentially expressed some flaw, but this alleged loophole… and Obama also did nothing about it. And the reason why it becomes problematic is it’s also used by a lot of hedge funds the way it’s currently drafted, and I don’t think venture capital or hedge funds are the same. But so it’s unclear or whether there’s going to be any change to the law. It’s kind of a silly change because the system we have is working. If you just look at venture capital, even if you change the amount of money the federal government would raise is fairly small, because there’s not that many venture capitalists, and it does create risk to the venture capital system. @semil: And most don’t even get in the carry. @rabois: Well, yeah. That’s true too, right. Unless you’re a successful venture capital investor, you don’t get a lot of carry, or any. Unless you’re getting carried, it’s obviously not taxed. Now, one potential impact is Trump is, at least, allegedly going to lower personal income taxes into the income tax rates. If they get reduced and the capital gains rates stay the same, the spread between the two may get compressed, in which case the difference doesn’t matter.
So where all of this policy matters is if there’s a big difference between personal income tax rates and long-term capital gains treatment, that obviously creates incentives, and incentives are pretty important to people. But if you harmonize the two or the gap becomes small, then the difference doesn’t matter as much. For example; this isn’t going to happen, but if Trump implemented a flat tax at 15%, it wouldn’t matter what the capital gains rate was because it’s going to be the same or below.
In any event, nobody is sure what’s going to happen. I think most of Silicon Valley thinks that they can discriminate between hedge funds and venture. I can think of lots of ways to do it, some which have already been proven in law. We went through this era from 2008 to 2012 where small business investments were exempted from federal capital gains treatment, between 25 and 75% exclusion, so there’s a precedent for that, when you invest in companies that were worth less than $50 million. So we could live as venture investors pretty easily, if you just exempted investments below, let’s say, $100 million of value, qualified them for capital gains treatment, I think everybody could be happy.
On A Trump Bump
@semil: One more market question: Do you expect, like many people, a Trump bump in terms of the economy? I mean, we’re already seeing a little bit. @rabois: Well, the economy’s clear. The markets are clearly have not collapsed, which many people predicted would happen. Because of the implicit volatility and unpredictability, usually markets are afraid of that, and you haven’t seen any of that. I think the reason why, in so far as I can detect it, is the markets were baking in a lot of increased regulation and micromanagement of the economy by Democrats and Hillary. As soon as that went away, you were discounting by the volatility and potential recklessness of the President, but this overhang of we’re going to over-regulate the United States, and overtax the United States, went away as well. So net-net, the markets have been and are actually are pretty positive.
Post-Script, we discuss some non-political topics…
@semil: Let’s talk inside-baseball, non-politics, Trump-related. Give us a quick update on OpenDoor. @rabois: Yeah, so OpenDoor company is growing. It’s still rather fast and sometimes shocking that you wake up and there’s like over 200 employees that work there. We’re going to need to move to like our third office or something crazy like that. Growing the team. We’re recruiting very actively. We finally added a CFO, which is nice for a company like ours. Very, very, happy. It’s got the opportunity to be one of these incredible companies. We have a lot of work to do, though. The problems only get harder, the challenges get harder, and people align in the team correctly, and figuring out what DNA you need to add. All that stuff gets more challenging as you have more product market, fit not less. So, lots of work to do. Lots of stress to confront, but very optimistic.
On Non-Tech M&A of Startups
@semil: What about this idea that they’ll be some kind of bailout for Silicon Valley, from non-tech companies through M&A? @rabois: You’re definitely seeing some of that play out right now where I think there are… just, you know, you talk about asymmetric of these observations is when Andreessen wrote software is going to eat the world. You’re seeing that now play out that software is eating every industry. Some of the incumbents are realizing that and saying, “Okay, well how do we buy some software.” And some of these incumbents have a lot of money certainly on their balance sheet, or market cap, and so they can leverage some of that even from a defensive perspective, at the level of offense.
On Big Startups Crashing
@rabois: I think that may be a savior for a lot Silicon Valley companies because I think 2017, personally, the first six months is going to be a disaster. I think you’re going to see the Pebble story, the Beepi story, the ProductHunt story play out every week. @semil: There’s so many more coming. @rabois: Oh my God. I think there’s going to be literally at least one a week of a high-profile company that absolutely crashes and burns into maybe a talent acquisition kind of style thing. Basically, any high profile company that raised money over two years ago with a high burn rate that hasn’t raised since is probably in deep trouble. So, I think that this is going to be a very depressing year in many ways. @semil: You think there’s going to be this kind of weekly drumbeat of, “Oh there’s a company that I know or maybe it was a customer of, or had friends that,”… @rabois: Absolutely. @semil: …that raised a lot of money. @rabois: In 2013, 2014, particularly. @semil: Those stories will compound on each other. @rabois: There’s going got to be at least 50 of those companies out there. I think we’ve just seen the tip of the iceberg on this. @semil: If you’re right on this, that seems like it would take, in terms of the energy in the ecosystem, or the sort of exuberance, it could last a year. @rabois: Yeah. I mean, it’s a little bit of tale of two cities. You’re also going to see Snapchat thriving. You’re going to see, as we’ve talked about, OpenDoor growing. They’ll be the companies that have done very well over the last two-three years strike. There’s clearly companies with massive momentum that are changing the world and going to continue to thrive. To prove your point about network effects and lock-in, that will only get better. But, I think the companies that have a high burn rate, that couldn’t get their marginal cost structure to be correct, and that raised capital at a high price, are in for a very high-speed collision with a wall this year, and particularly the first six months. It takes two or three years to wash this stuff out the system. Because, generally, you raise money that can last for two, three years, but nobody wants to fund those companies. Nobody’s looking to fund a broken company at the moment. People all want… and so far as to paying a high price, or spending a lot of dollars, they want a high upside, high growth, high potential company, not something that might have missed its window.
On Non-Tech M&A Trends
@semil: One question for myself is to benefit on that. I haven’t been around that long, but it seemed like in the past when venture capitalists would help bridge a connection from one of their portfolio companies – so let’s say a local technology company – then I’d say, “Oh well if you’re looking for a security solution. Here you go.” If we see more non-tech, let’s say across the U.S., or even global companies that are not inherently technology companies, finance companies, how can investors add value in helping broker or sort of plant the idea for those types of sales? @rabois: It may be an interesting point of leverage for venture investors to forge relationships on a sustained basis with large Fortune 500 potential acquirers that are not technology-based, because founders generally won’t have that network. We can justify across a wide set of companies and say, put on for example, have what’s called the Customer Day by some, put on a slate of let’s say 15, 20 of our portfolio companies, have a significant executive presence from Target, or name your favorite non-tech company, come and meet the most interesting companies, see which ones they might want to partner with, invest in or acquire. @semil: It just seems like even with some of the best VC firms here, their networks necessarily don’t expand to the large CPG, or oil and gas. @rabois: They may hire some people to help with that. In healthcare. So for example, we do a lot of healthcare investing at Khosla, so actually 20, 25% of our portfolio is related to health.
So, we’ve intentionally spent a lot of time forging relationships with senior leaders in traditional healthcare companies. As you invest in a vertical or a domain, you may want to have your partners or complements to your partners spend a lot of time forging those relationships. @semil: What are the backgrounds or specs of those types of people that can bridge that gap or help understand that? Because you’ve got to understand what’s happening here, but then they have to have those personal relationships. @rabois: This is a tricky hire. It’s a challenging hire because, fundamentally, what we need is someone who understands that the key strategies for those companies, like the top two or three things. At least, you’re not going to spend $600 million on one of our companies, unless it aligns with the CEO’s top two or three initiatives. So, someone who has that level of visibility of insight into what are the top challenges for this company or versus that company, and then b) understands technology and the landscape here well enough to be able to identify which companies might fit. So, it is a challenging hire.
There are some people occasionally that have worked at a variety of tech companies and grew up in CPG, or something like that, or vice versa. You can find it, but it’s not a natural combination.
What’s Over- and Under-Hyped?
@semil: Got it. Okay, so last question, and thank you so much, Keith for your time. Right now what would do you see as the most overhyped thing in tech startups, and the most under-hyped thing? @rabois: Overhyped. I still think the VR is mostly overhyped. I like AR a little bit more in terms of its use cases and potential adoption. Under-hyped… @semil: Just expand on that. Do you think VR is overhyped in terms of its time to hit the market or just in general as a consumer? @rabois: I don’t think it’s a consumer platform. It’s an entertainment device, whereas AR actually can become a consumer platform. The only question is: Is the AR here? This is something we’ve never thought and haven’t thought about yet, but that, to me, is like a no-brainer. Then under-hyped? I’m not really sure mostly because I don’t tend to think that way, meaning I’m sort of like a founder-driven investor, so I don’t have a lot of micro hypothesis about the world. I generally wait for a founder to walk in and teach me about the world, and so I don’t have like, “Oh I would love to find X.” @semil: Let’s ask about it and I’m that way too. What are you seeing now. Any trends of founders coming in, let’s say, that are under 25? Then maybe, they still haven’t sort of… I feel like now we’re going to… the people who are 25 and over, they may have started one company, maybe two and there’s still some gas in the tank. What about people coming in under 25? Are you seeing any sort of differences in between them? @rabois: They’re interested more interested in healthcare, which is interesting. Three or four years ago when I started investing here, I started investing in healthcare and not everybody was interested like we were doing recruit for our portfolio. There were some people who were interested, but you had to talk to a lot of people that’d be like rejections. “Oh, it’s regulated. Blah, blah, blah, blah. There hasn’t been any massive companies created for a long time,” blah, blah, blah, all these excuses. Now among young founders, there’s a lot of interest in healthcare innovation. So, that’s great and we like to endorse that. Clearly, they ask about AI, and want to talk about AI, and machine learning, and all that stuff. @semil: That seems like just now going to be baked into everything. @rabois: Yeah. that’s … my personal opinion is an independent AI based company doesn’t make a lot of sense. Not all the partners agree with me. But fundamentally, I think it’s a use case. It’s powering a specific use case, a specific vertical with AI, where you have proprietary data and access to propriety data, and you have a very specific value proposition that has economic transformation that you’re unlocking. I don’t believe in a general AI sort of startup, barring, extraordinary circumstances. Then, we have invested in a few, so there are times where there’s extraordinary circumstances. But if I was counseling a younger founder in Milwaukee and say I’d stand up and say, “Go find a real problem to solve, and then show me how you’re going to use proprietary data and AI to solve that problem in a way that’s 10 X better than what people do today,” that’s a company.
(Below is the full transcript from my fireside chat with Chamath on Dec 1, 2016 in San Francisco. Below is the full transcript, including audience questions. We covered topics related to the election, how the Bay Area may be treated by a new administration, changes in healthcare, the impact of social media and our elections, and much more. Enjoy!)
Semil: Yeah, so this is going to be a treat and Chamath, thanks for making the time to spend with us today. Happy Holidays.
Semil: Until Christmas comes.
Chamath: I’m going to make myself comfortable.
Semil: Yeah, make yourself comfortable. It’s a fireside chat. I’ve had the pleasure of having a public conversation with Chamath a few times, and I try the technique every time where I… I’ll sort of feed him in advance, maybe want to talk about something, each time he’ll say, “No, let’s just go.” And so I actually created a little list of things, so I’ll let you, Chamath, pick.
Chamath: You should talk about hard things.
Semil: What we’re going to talk about first. I’ve got six topics. You choose first.
Chamath: Election date news, globalization, trade immigration, role of Silicon Valley, filter bubble, and tech news, Twitter, etc., sports and athletes. Well, I feel like one, two, four, and five are the same.
Semil: Here, I’ll start out with a more specific one.
Chamath: These are shitty topics. These are not hard.
Semil: Okay, let’s start out with… so I’ve listened to your podcast about the election. In as dispassionate view as you can, which I know is hard, is the election good or bad or neutral for Silicon Valley and tech?
Chamath: I think it’s a multi-faceted answer. I think in… well, I think broad based, I would say, it’s actually quite good. It’s probably the best thing that probably could have happened to us for the following reason, which is there’s a type of conversation that I think that’s happening now that probably wouldn’t have happened if Hillary had won. Part of it, I think, centers around this idea that we have cocooned ourselves into this nice, beautiful, little existence that’s frankly just detached from reality.
Then separately, we were never forced to really understand the scope of the problems that we should have been working on. The real implication of that is I think you’re going to see this probably in two or three years where when the capital cycles start to change. There’s just been so many really poorly constructed businesses and business models that are going to be under pressure. So I think all of those conversations can now happen because of the election.
So in many ways, I think it’s probably the most useful thing that could have happened. At a more moral and ethical level for a lot of people, I think it creates a lot of doubt and fear, and that’s unfortunate. But I think the net balances can be positive if you look at it that way.
Semil: And what do you think the new… what’s your view on the new administration’s relationship either with Silicon Valley or with the technology industry in general? Is there a role for The Valley practically to play?
Chamath: Yeah, I mean I look… I mean I think you can look at the President Elect’s tax plan. I mean it’s nothing but good news. If you actually are somebody… well, let me actually take a step back and talk about sort of the roles I see.
My big kind of like clarifying moment that’s happened sort of in the last few months along the following dimension. We do these really intensive portfolio reviews inside Social Capital where we go very deep inside of our companies, and part of that is because over the last five years we took a lot of these capabilities that we had at Facebook, which is where I and a bunch of my partners come from, and we built it into frameworks.
At first, we were worried that those only applied to Facebook. That all the things we did in machine learning, all the things we did in data science, all the things we did around data acquisition. But over time, we found that they applied to all these companies. We deployed in all those companies that we work with, companies at Slack and Intercom, companies you know, and we collect these artifacts. Now these artifacts have been building up over years, okay?
Incrementally what we did was we did..this is a long-winded answer, but I’m getting there…Incrementally what we did was we took all those capabilities and we stuck it on the Web. We built this thing called a “magic 8-ball” framework that we said, “Founders, get your shit together. Get your head out of your ass and understand your business.” So you come to our website, it’s like three or four clicks deep. But the point is, since we put these series of blog posts out, we’ve had, as of this morning, I looked, 3,400 companies run a magic 8-ball. The magic 8-ball is effectively GAAP for a startup, right, generally accepted accounting principles.
So if you’re a public company, how could you compare, for example, a public company in healthcare with a public company in oil and gas? Well, there are rules, and it’s called GAAP, and it’s how you basically report out your earnings, create balance sheets, and it allows you to make an apples-to-apples comparison across industries.
Similarly, we felt that that would be possible in startup time. What is the difference between an enterprise software company and a consumer network of that business? Well, today the easy answer is everything. They’re all different. Our perspective is actually they’re all quite similar. You just don’t know what to look at. So we tried to create this framework.
So the long story is we’ve collected this entire corpus of information. In a quarter, we’re going to actually release a benchmarking tool out to founders that will allow you to understand how you measure on these very deep nuanced metrics across thousands of companies. So how are you doing on LTV to cap? Is that important? Maybe it is. How are you doing on fixed-mount retention? Is that important? Maybe it isn’t. What about if you’re in the top 8%, 90th percentile in a certain category, and the bottom fifth in another category? To know that is really powerful because you can now start to fix your business in there.
So first thing in a portfolio review, and I’ve been thinking that something is amiss, and what I see is degrading sales efficiency in some of our enterprise SaaS businesses. This thing clicks and I go off, and I’ve been thinking about it, and I will come back to the following framework, which is there are really only three kinds of companies that get created in Silicon Valley. Two are valuable. One is a category of complete dog shit.
Category one is what I would call “bits to atoms.” So you’re building something in software that then gets translated and manifested in the real world, in physical atoms, right? So what are examples of … let’s use scaled companies, okay? Amazon is a fantastic bits to atoms company. It started off as completely virtual e-commerce, but now they build more things in the physical world. They’re buying boats and planes. They’re building robots. They’re building fulfillment centers.
Tesla. Another bits to atoms company. They have fantastic software and capability, but it manifests in batteries and engines and cars. Literally raw material comes in the front of the Gigafactory. Model X’s come out the back. Apple, for better or worse, translates really great software into a fantastic, physical product. SpaceX. And we’ve done a lot of these bits to atoms companies and what I’ll tell you about these companies is they’re fundamentally defensible because they are hard, they’re not obvious, and most founders don’t have the patience or the wherewithal, or the sources of capital caps to go build them. And so, as a result, they’re quite bleak.
Those businesses in this new administration will absolutely thrive because you’re going to have the administration that is going to be very pro-United States. They’re going to seek out companies and markets and businesses that basically promote Americans’ excellence in things. If you are building physical things… so for example, we have a company in Los Angeles that is constructing what will be the biggest, high-precision 3-D printer in the world. We’re using it to actually print the stage two rocket. So what is like a 65,000-part build will get reduced literally to two or three parts, which is preposterous, okay, but it’s happening.
But what I say is even if that works or doesn’t work, the point is we can create a renaissance in 3-D manufacturing in the United States. Airplanes, fuselages, wings, all kinds of things, propellers for windmills. You name it. To think that the current administration will not be all over that business is naïve. Of course, they would.
So the fact that technology businesses can actually create a renaissance of things that can build this stratification of job growth, right, not just $200,000 software engineers, but all the way up and down the stack, is a really powerful concept. That will win.
There’s another kind of category of business that I think is fantastic, which is what I call “sticky bits companies.” So what are those? Those are marketplaces. Those are network effects, and specifically in enterprise, those are top-down system of record sales companies, okay? So what are examples of those? Facebook is an obvious one. Snapchat is one. Slack is another one. Those are really, really interesting kinds of businesses. Why? Because they’re very hard to disrupt once they get going. There’s an inherent flywheel and momentum that creates a usability mode, or an acquisition mode, or some kind of a mode that we can’t necessarily just overcome with capital.
Then, quite honestly, there’s everything in the middle, which is everything else. What you realize is that’s a lot of companies. Some prior enterprise companies fall into that category and they haven’t realized it. I thought that they were fantastic because their revenue traction was like this, and I thought, “My gosh! This is great.”
Chamath: A million of ARR. $3 million of ARR. $5 million of ARR.
Semil: How does that change the strategy when you’re doing a portfolio review and have… do you communicate that to… how do you communicate that to the founders?
Chamath: I’ll get to that in one second.
Chamath: So you hit a wall, and I think the reason is because those companies benefited from the fact that you could sell software with a credit card right? But it was naïve for us to think that all of a sudden somebody else could come in behind us with the same strategy to disrupt us. Before you had 10, 15 years to build a business. Now you have four or five years to build a business. That’s not enough time and you have to load your business up with sales and marketing, and HR, and PR, and product marketing and customer success. All this infrastructure that is secondary of what you really have to do, which is the fundamental core product market thing.
Those businesses, I think, are in real trouble and the reason why that’s in real trouble is, again, I think it’s somewhat related to what’s going to happen over the next five or six years. This administration has made clear, which I think is a fantastic thing, they are going to pump trillions of dollars, trillions of dollars. Literally with a T. Infrastructure spending, massive capital projects. That is going to be a renaissance of, I think, middle income job growth. But what it’s also going to do is going to inflate equities to a degree we probably haven’t seen in a while.
And so if you can get 15%, 16%, 17% IRR in the public market, why would you ever put your money into 10-year, illiquid venture capital for the same IRR? It doesn’t make sense. So I think what actually happens is the following. Bits to atoms companies thrive because there’s a manufacturing and US-first message that works. Sticky bits companies, because they’re capital light, highly sticky. The businesses in the middle must get very precise very quick because those companies will need to go and raise capital, but they will be faced with the following capital dynamic, which is that the public markets… like we have as much public market exposure as we do privates. I struggle everyday now to think about how I deploy incremental dollar into privates for the same effective return when I shouldn’t really just put it into the publics because I know the publics are going to riff. Because when President-Elect Trump forced $2 trillion of money into the public markets, I’m telling you the Dow is going to go like this. The S&P 500 is going to go like this, and it’s liquid.
So those dynamics, I think, need to be understood, and we typically don’t even think about that. We don’t technically think about what does Washington do or what could New York do to affect us? But that is what it’s going to do. It is going to change the capital cycle because it is going to change the risk reward. The last seven years have been that money is free, the public markets gyrate sideways plus or minus, and the only return – perceived return – had been in private, illiquid investing.
The public markets are quickly catching up. Debt is going to catch up because we’re going to see interest rates rise. All of these things have an effect in the real rate of return you can generate in your asset class, which, by the way, is not going up. It’s actually flat to going down, and the reason is because for the last eight years we have all this money flood in and what used to be a $5 million rate is now a $10 million rate. What do you think happens with that? It’s not as if the outcomes are also doubling. The outcomes stay the same. The prices go up, which means the return shrinks.
So these dynamics, I think, are now going to come to the fore and the next four to five years is how all of this stuff goes up. But that’s a very long-winded answer. But that’s why I think… that’s why I think Trump needs the Silicon Valley. It is a wakeup call, a sobriety check, on rational company building, thoughtful business model construction, strategic operational guidance of the business, and that is in short supply.
Semil: So… and that is a very interesting take and this topic is going to pique as interesting, but I was curious from your experience at Facebook, and in all the results and sort of, I guess you can call, controversy around Facebook, and filter bubbles, and stake views. What’s your point of view on that controversy? Is there anything Facebook shouldn’t do?
Chamath: So I don’t want to talk about Facebook, but I will talk generally about social media.
Chamath: I owe everything to Facebook. I’m low to those guys. Let’s just call a spade a spade. They have a difficult job, almost impossible job, but let’s take a step back and not talk about that. Let’s talk about…
Semil: Let’s take it in feeds. So, Twitter, Reddit.
Chamath: Well, let’s actually talk about social media jobs.
Chamath: It is fair to say… and I think you can always… you can actually put Google in this category as well. Social media, we’re using generated content, is modern feudalism, okay? So let’s call it that. You have 1.8 billion Internet-connected individuals all around the world that are fastidiously doing the work, doing the hard work for companies that now are tens of thousands of employees deep, not much more, to then monetize and then share that within themselves.
Okay, so for example, let’s look at Google. That’s a $517 billion market cap company. The core escape velocity was page rank, but how did page rank work? Page rank didn’t work because Google all of a sudden judged the quality of the search index. You did that work, and Google was just able to harvest that signal, right? So, you did the work. They built the $517 billion system.
Most social media UGC companies, you upload the content, you annotate it, you create great, brilliant experiences, you don’t get paid. The company that owns it gets paid. So the first thing we have to acknowledge is that there is a compact that has existed for a while that we probably didn’t anticipate. In that compact were some expectations, and now it’s all coming home to roost.
There was theoretically an expectation that us, as a consumer, was owed some amount of truthiness, quality, and SLA. That was never in the SLA. That was never in the compact. The compact was you’re going to do the work and we’re going to make the money, and that happened. All the incentive systems, and this is not a company-specific thing. This is an entire industry classification thing. That is just the truth of what happened.
When we look at what’s happening now, I think what we have to realize is those companies are in the job of making money. When you look at how products are constructed, so now let’s talk about feeds in general and let’s compare it to newspapers. So let’s take media of the past, newspapers or television.
They were time bounded or physical space bounded, right? So in the case of television, you had a 30-minute window. A show started. A show ended. There were blocks of time that were sellable. There was a message that it has to get truncated in a fixed-period of time.
Let’s take a newspaper. You sat down. You opened the paper on page one and it would end on page 10. So my point is there was scarcity in old media. So you have to now actually have an SLA around the quality of the content because it had a direct correlation to engagement, which then had a direct correlation to modernization.
We divorced ourselves from that expectation in new media because the first thing we did was we eliminated scarcity, right? There’s a reason why feeds are infinite scroll, guys. There’s a reason you can’t get to the end of YouTube, right? And the reason is because it’s directly correlated with modernization, right? There is one single economic formula that guides all of social media, which is clicks times ECPC. That’s it.
So I think we just need to be really intellectually honest about what that compact is. We should have never have been expecting truthiness. But if you do want truthiness, now I think is the time to demand it. But then the question is: What are willing to do if you don’t get it? That’s also a very… that’s a really difficult question that I don’t think we also don’t know how to answer right now.
So I think social media in general has been constructed in a model that is purely about the feudalistic modernization in capitalism. This modern form of something or other, that is just a fantastical business model of all times, right? If you add up the entire market capital of all UGC companies, a trillion, $2 trillion, right, globally. How many total employees? Less than 300,000, 400,000. That’s preposterous. Two billion people generating $2 trillion in value shared by 200,000, 300,000 people.
b>Semil: Do you think anything changes in either how any of the companies present content or how users behave or this is all just sort of…?
Chamath: So that’s what I’m saying. So now I think we have to now shift and say let’s have a more first principles conversation about what we now know is actually happening. There is a modernization formula that dominates, and we have to ask ourselves, “Are we willing to compromise usability and quality of the product as it is today in order to get some of these other things?”
So as an example, there’s a person that I think, for me, I follow a lot because he gives me the most truthiness of my network, which is Joe Lonsdale. Joe Lonsdale, to me, is my sort of like keystone of truthiness. That guy finds unbelievably clear, clean, thoughtful content and he shares it both on Facebook and on Twitter.
Does it change the usability of my product because I now don’t look at my feed as much? Instead I can just search for Lonsdale, see what he’s posted, and read that stuff. I do that. Does it mean I miss a bunch of stuff? Yes. Does it make me more detached from the people around me because they’re like, “Hey, did you see my great, awesome cat dressed as Luke Skywalker for Halloween?” I’m like, “No, motherfucker. I could care less about your cat. I was reading about whatever Slate Star Codex had to say because Joe Lonsdale thought it was important and I trust Joe Lonsdale’s filter.”
So I have changed my mental expectation of what these channels should give me. It makes me less superficially connected to the people around me. It makes me more introspective and thoughtful about my worldview. That’s not necessarily a fantastic formula for friendship. So how many people are willing to make that tradeoff? Are you going to make that tradeoff? Do you expect the services you use to make that tradeoff for you? That’s a very slippery slope.
So I have no clear-cut answers, but I do think another solution to this is that there needs to be some of these products or sites – both offline or online – that need to be more operated for public trust. I think the most simple way to get back to a model of scarcity and content value that relies on a SLA is to basically remove this primary driver, which is eCPC times number of impressions, which means if it was funded to not have to make money, now it could theoretically, theoretically at least focus on not generating clicks and views, but theoretically relaying content. There should be sources like that.
ProPublica maybe is one of those things. Slate Star Codex actually is quite good, and there’s a bunch of these things, but they’re hard to find, and they’re really super long-tail, and there’s no efficient way to share it once you do find it.
Semil: So now to get you in a more insular topic, I spent a couple days in New York after the election, and I talked to a lot of old friends and folks in the industry. They’re all reading The New York Times, and they all seemed very, very shocked. So I started to think about well, even in Silicon Valley or media, there is an echo chamber. It might be on Twitter. It might be in the various blogs. Is there something that’s analogous to what happened… on The Coast, for example, in early November, so what may happen in terms of the technology media landscape? Is our information filtered to a point where we don’t see what’s happening?
Chamath: Yeah, of course. Oh, our heads are so far up our own asses it’s unreal. Yeah I mean it’s not good, but it’s the truth. I mean, for example, let’s go back to how I started. There are three kinds of companies, right? Bits to atoms companies, sticky bits companies, and everything else. If you actually go back and if we tried to run a classifier on the last eight years, and last quarter of a trillion dollars of invested capital, what do we think we’d find quite honestly? We’d find very few of those bucket one and bucket two companies, and we’d find a tremendous amount of things in this bucket three company.
Part of what that speaks to is the fact that when things are easy, we pursue them because there’s a fast feedback loop. Part of what… why that’s happened is because we love fast feedback. It’s no longer okay to win in 10 or 15 years. For most people now, in this perverse way, that seems like the end of life as we know it, the idea that one could work for 15 years on something. It’s crazy. How could that be? It has to happen in three years.
Instead, I think to myself, “Doesn’t it seem plausible that if you can build $5 billion in value in two years?” Value, okay. “That could also just get destroyed in the same in the next two years?” Doesn’t that stand to reason? If it was that easy for you, wouldn’t it be that easy for somebody else to come in behind you? Of course.
So the thing is we’ve gotten trapped in this culture, this iterative feedback loop of now, now, now, now, now. So this is a fantastic moment in time where we can actually say, “Man, we have to divorce ourselves from this stuff.” The world needs us to help do things that are hard. But too much of our time gets unfortunately redirected into the things that are easy and obvious. The reason is because there’s an entire infrastructure of people that want to basically congratulate you and reward you for short-term, fake progress. None of it is sustainable ultimately, and especially when there is a capital cycle.
Most entrepreneurs right now, in just the volume, didn’t even go through 2007, ’08, and ’09, let alone 2000, 2001 and ’02. I’ve been through both of those cycles, and I’m telling you I don’t think we really appreciate what it’s going to take to survive when the risk premium adventure doesn’t justify the capital. I’m telling you guys we’re headed in that direction.
Semil: This is a good counterpoint to that. I’ve heard for maybe the last three years, really smart market observers and professors, saying, “The capital is starting to dry up, dry up,” and you do feel it in certain following rounds, but it seems like at the same time there’s more and more money coming in. So if that continues to happen, does that mean that what you’re predicting maybe will take longer to play?
Chamath: No, no. This is… look. I think you’re going to have probably two years of market highs in the U.S. equities. But things are lagging, right? All of… money is always a lagging indicator. With respect to revenue, it’s always a lagging indicator of value, and inflows are always a lagging indicator of risk allocation. The thing is you’re going to look back and in these next 18 months, it may be the case that that $100 billion fund that SoftBank was able to cobble together is the top. You don’t know in the moment. You only know in hindsight.
All I’m saying is this is not meant to depress you. It’s meant to clarify what you’re doing. The problem is two-fold. One is the courage and the instincts to do things that may not necessarily go like this. But, my gosh, I’m telling you. If you can compound 20% a year for 20 years, I’d take that 100 times out of 100 than this little thing. Okay, because this thing, honestly, as fast as it works, it can just die.
The other thing, though, is that then you need to find sources of capital who also understand that. At least what I’m trying to vocalize to you is that there are some places out there of people who realize that working on hard things is better than working on easy things. Working on things that are sticky that are not obvious, that may take years and years may be okay, because once they get going, they’ll get going forever. Oh, by the way, the ability for you to actually feel like you have the social capital to work on something for 15 years and it be okay is absolutely okay. And you to not live… like the filter bubble you need to break is the one in San Francisco, which is like, “Oh, everything happens in three to four years.”
Semil: Do you think that there’s more…
Chamath: By the way… I’m sorry. By the way, if you’re not quick, look at the last group of people you recruited and go and ask them how long they were there in last few jobs they were at. I bet you it’s two to four years max.
Semil: Real quick. If you have questions, just line up here. We’ll ask questions.
Chamath: The reason is because we conditioned people to think about this. It’s like, “Oh, everything has to happen in two to four years. Otherwise, I’m out. I’m going to go to the next company. Then I’m going to go to the next company. Then I’m going to go to the next company.”
This kind of mercenary approach to either being founder or raising capital, or being an employee is a destructive thing, but it also is a path for us to be completely out of touch with what really needs to happen. There’s a reason why SpaceX is going to be a $100 billion company. But, guys, it’s taken them 14 years. I mean because it’s hard.
Semil: Do you think that is a local mindset that gives an opportunity to other locations? Is that specific to this area?
Chamath: It’s a decision. It is a decision. It’s a decision to listen to what Gurley has said a lot, who, I mean he and I are quite aligned on this generally. What I’m maybe saying now, for whatever its of value, is to make hard decisions and then take the time to find the source of capital that it needs. I think that really matters. Then separately, that’s at this high level. But then practically speaking, to use metrics, to use data, to use things like our magic 8-ball to just show you the way. Then to be thoughtful about experimenting.
Here’s an experiment that we’re currently running. As an outcome of this view, what I said to the team is, “Can you please go and figure out how we could maybe abstract all the sales and marketing from all of our big-tier SaaS companies and we will stand up a company and embed it into our growth team?”
Initially I get the same feedback. “It’s not possible. Only I can sell my thing.” I’m like, “Really? I mean it seems to me Salesforce is selling 90 things better today than they did 10 years ago when they were selling one thing.” IBM sells 150 things.
Chamath: Microsoft sells 9,000 things, and they just seem to be getting bigger and bigger and bigger and bigger. “So you are fucking bullshitting.” So what if we could actually just take all of the sales motions and generalize them and abstract them so that now a company can be even more leveraged and focused on their voting market. Now we can have best-in-class people and we can actually staff those people all over the country. They can be in Ohio. They can be in Michigan. They can be in the Central Valley.
You can’t staff a sales organization here, guys. 200,000 fully-loaded OTE for a startup trying to sell a product for a few thousand-dollar ACV. That dog doesn’t hunt, okay? You don’t need to be a magician of Excel to figure that out. So these are basic unit economic-level discussions are not happening in upscale.
So what happens? You get some ARR growth and you raise more money, and then you unprofitably acquire more customers, generate more ARR growth, raise more money. That’s not sustainable.
I think the thing we have to realize is there has to be different, more creative, thoughtful ways of company building. There needs to be more practical, quantitative incentives, and you have to break this relationship with this theoretical, romanticized notion of how success works in terms of time. It doesn’t take four years. It may take eight and it probably takes 12, so buckle in. Capital. Doing more with less is always the better way. Sobriety around all of the things that matter versus the things that don’t. I mean, this is the last time we talked about it. kind bars and exposed brick walls walls don’t matter. It will not be correlated to your success.
Then, working on hard things. Because the fast feedback loop, while it feels good, because there’s a dopamine rush initially, you must internalize that it creates equal and offsetting risk that somebody else can compete with you to do the same thing, but their motivation will be to do it cheaper, faster, and better because that was your motivation to beat the incumbent that first allowed you to get that momentum in the first place, right?
Semil: Great. So we… we’re going to take some questions. If you have a question, just step up to one of the mics, introduce yourself, and a brief question, please.
Audience Member: Hi, Chamath. Victor from care.coach. You talked a lot about looking at hard problems, Trump as well. I’m just curious what your views are on healthcare given all that’s happening.
Chamath: There’s been a couple of things that have been really negative tailwinds. Sorry, negative… there were some massive tailwinds in healthcare that have now become massive headwinds, and I’ll explain a couple of them. One is at a state level and one is at a federal level.
So at the state level, there were a lot of businesses that theoretically could have existed, but we’ve had California enact two things that are actually constructively quite negative. I’m not here to debate whether you agree with them or not. I’m just temporarily relating some facts.
Number one is around licensure of certain parties and business models that are in the periphery of healthcare. Not the hospitals themselves, but whether it’s a school nursing facility, whether it’s like the at-home care, there’s a whole bunch of downstream things that are involved in the healthcare lifecycle and keeping people well that are now more regulated than they were.
Secondly, there’s been also some very specific rules around compensation, minimum wage increases, and the way they do account for overtime and overtime payment. What that’s done, unfortunately, is a practical matter in California is there’s a bunch of healthcare businesses that frankly now cannot exist. As a result, what’s happened is a bunch of black market activity on Craigslist.
Second is I think the… I think not knowing what the President is going to do around Obamacare and the ACA has slowed down and caused Medicare and CMS, things that are related to it, whether they’re insurance kinds of businesses, whether they’re reimbursement-related businesses, I think are also now in deep, deep trouble.
Now let’s talk about some tailwinds. But there are still some structural tailwinds that exist. Number one, theoretically people are actually going to have more money in their pocket. There’s a direct correlation with chronic disease and people having more money. So whether we… obviously, we don’t like this, but the reality is as we have more money through the tax cuts and everything else, diabetes will go up. Cancer will go up. Asthma will go up. Obesity will go up. So those diseases will still, unfortunately, continue to compound its deleterious effects on society.
Number two, there are just these massive personnel shortages that exist within the healthcare system that are not well serviced today. Nursing being probably the most important one. So that’s my kind of like short-term view is that we’re quite nervous about what the impacts to reversing some of the Obamacare policies are, but the good news is we actually had very little exposure to the Medicare and Medicaid type of businesses, and we still are in businesses that have some reasonably good tailwinds, particularly around chronic disease, that we still think has tremendous value, no matter what.
Audience Member: Love your insights get me super fired up as an entrepreneur, so I appreciate it. So I’m a San Diego company and we raised… we just raised a round of capital, and one of the things that helped us closed is we really communicated to our investors that we want to build a sustainable business. We reached cash positive this summer. We’re now trying to shoot for a series A or shoot for these crazy evaluations. Are you seeing companies here in The Valley just holding chase to valuations versus companies outside in markets that kind of get lots of attention?
Chamath: Yeah, I mean I think that what’s happening is that there has been this culture where people… like look, you know how they say there’s this… one goes this phrase like history is written by winners. But the real thing is there’s a narrative fallacy, which is bullshit version of history, which is history is written by [losers?]. The thing is if you’re going to write a story in hindsight, obviously, you’re going to project yourself as this strapping, muscular winner, good-looking, I can dance, I can dunk, I did everything right, right? You romanticize it. You bullshit. The problem is the end plus, first person that hears that thinks, “Oh, my gosh! They must be telling the truth.”
So the effect of all of this is that you have had people chasing valuation because they think, “Oh, valuation means something.” It means nothing. There’s a fantastic investor who told me, which I love this idea. Haven’t you ever wanted your company value at billions of dollars ever? He’s like, “I want it valued at zero until the last possible moment before we get liquid.”
He’s right. Why? Your employees make more money. You make more money. You take my solution. You’re more sober in your application. All of those things are good things.
So to your point, yes, I do think we’ve kind of been chasing these wrong value metrics. We use to chase registered users. Then we realized it was now. Then we realized it was down now. We’ve been chasing valuation, and we chased the post and we think it means something.
Guys, there’s been less liquidity in the last five years than ever. None of these valuations mean a goddamn thing. They mean nothing, and we take them so seriously, and we pat ourselves on the back and we think something real is happening. It’s the blind leads the blind until these things get out, and the way to get out is to get profitable. There is no way to get out. So, yeah. Get to profitability. That’s just awesome. I wish you the best of luck.
Audience Member: Okay, so it seems that what you’re attacking or being contrarian about is, in fact, all the people in this room and the start an ecosystem that is attempting to scale entrepreneurism. The thing about pursuing things that are hard is that that many less people are going to be able to do that. That most of these ideas about these little schmati, stupid ideas and y-combinator loves that shit.
Chamath: Well, wait a second. Hold on. I think that that’s not fair and I’ll say this. So I saw Sam yesterday. That’s not true. Those guys… for example, like this space printing company was out of YC. The reason we’re involved and the reason why… he actually will tell you. He had to create a separate path for those companies because it is so hard for them to get any attention. It just… all I’m saying is it takes a different capital cycle. What I’m telling you is there are actually more profits in those hard businesses than in these businesses.
So what we need is actually a reframe of how we think about value. If you did that, there isn’t… it doesn’t take a $100 million to print this robotic arm business. The 3-D printing business we’re in was at a $7 million check. It’s no different than any enterprise Series A company.
We just did this fleet of autonomous drones in Alameda. Those drones that are in the water circumnavigating all the oceans, measuring fish stocks, oil spills, climate change, was an $8 million A. My point is their go-to markets are different. The way they construct the business is different and it takes a different kind of investing lens, and I think it is possible to have, and we just have to create incentives that celebrate those people so that, to use your language, it’s not just the shamatzy stuff that we pump up and we say is what… because the person far away that’s not here, when TechCrunch gives 50,000 page views to the schmutz and one page view to the drone company, guess what they’re going to have? More schmutz.
That same person can probably build the next fleet of drones or cure cancer, and there are capital sources that can fund it. I’ve got… we have a lot of money that we can deploy of hardship.
Audience Member: All right. Typically might need expertise and experience, and I don’t have to tell you the people who are over 35 probably can’t even get in the front door. That there’s…
Chamath: Yeah, that’s so true. Totally, dude. I totally agree with you. Look. Listen, my whole thing is for every person that drops out, which is fine and good, there is so much value in working at a company. I worked at AOL. I worked at Facebook before I started my startup, and I felt way more prepared. I was a 36-year-old founder/CEO. I’m glad I waited till I was 36. I had so much more knowledge because I learned from the side gig. I learned from people that were better than me. I also learned from people that were not as good as me about all the things that I shouldn’t be doing.
So to your point, I agree with you. This is what I’m saying. We need to divorce ourselves from this romanticized narrative… like fallacy that we’ve created that is this two dudes, 22 years old, dropped out of school, coded some schmatzy thing. That’s not what success is about necessarily. There are some great examples of that where they’re creating real value, but there’s all of these other things. There’s 40 year olds. There’s 50 year olds. There’s 35 year olds. There’s men and women. There’s people doing all kinds of things that are not easy, and we have to find a way of telling the world that this also exists, and this stuff is worthwhile because I suspect that the long-term solution for us being less tone deaf and for us to actually be a constructive part of the solution is to celebrate with these people.
Audience Member: Right, and so my own life, my own experience has been that software, the purpose of software is to actually change the world, and if you can make some money along the way, great. Unfortunately, in this world, you’re only as good as your last IPO and how much money you made, and a lot more money was made off my company than I made. A lot of people made a lot of money, but in fact, we wouldn’t have multimedia if I hadn’t started that company.
So at the end of the day, software is… it shouldn’t be about waking up in the morning saying, “How much money can I make?” It should be these hard issues that I’m trying to solve, and yeah, I’ll make some money along the way. That’s kind of been my philosophy.
Chamath: Fair point. Absolutely, absolutely.
Semil: Last question here.
Audience Member: Hey, Chamath. Josh Venga Airspace Systems. So you talked about solving our problems, hardware, software, high-speed physics. This drone is in very high speed.
Chamath: Bits to atoms.
Audience Member: Yeah, you got it. So one of our challenges is it’s all about talent, right? My #1 job is to see if the best of the best talent we can get on board. Having a lot of challenges in that because you’re fighting the Teslas of the world, the Facebooks of the world, the Googles of the world, and we’re going to Canada. We had a lot of great talent from Waterloo. You’ve been talking about it.
And so the problem is that we’re worried about the immigration. A lot of these engineers and professors that we’re grabbing from Canada are worried about this new administration, all the talk about yanking green cards, and things like that, and what are you hearing about struggling Visas and…?
Chamath: To be honest, I haven’t really… I haven’t heard anything yet, but I think what’s fair to say is I think that there’s a view of the American exceptionalism, which I think is actually quite constructive, and at the end of the day, it seems… I could be wrong, that Donald Trump is quite pragmatic and wants to winner.
I’ll just use a sports analogy like… if we want to talk about sports for a sec… When sports teams win is when they recruit the best. What’s amazing is I can get these people in. They come from all different backgrounds, and you get them organized. You get them running on the same strategy and they win championships. If they’re really good, they win multiple championships.
At some very basic level, our America has the ability to be unlike any other country in the world. It’s the literally sharing with the best of the best. I think that’ll be a decision that the government will probably make constructively because I think if you take American exceptionalism to be extreme, why wouldn’t we want to be the best? If that includes people who want to legitimately be here, contribute their intellectual capital and monetary capital, we should find a mechanism and a way to do that. So I suspect that he’s going to be pragmatic about that stuff.
Semil: Well, as predicted, that was great. Thank you very much, Chamath. Thanks, everyone, for watching and we’ll do it again some time.
As Paul Graham usually does with his essays, he makes a deep point with relative ease. Today’s essay, which many of you have read (and if you haven’t, please read it here) is even more intense. I had a sense he would be writing about the relationship between the proliferation of technology and its potential relationship to income disparity, and I know from some of his tweets over the course of the last month, he was likely extra careful in selecting his language for fear of being accused of insensitivity given the consequences if his theory is correct.
I’ve read the essay now twice and, as someone who grew up studying history and still tries to pay attention to how broader themes shape nations, societies, and cultures, I have to say that Graham’s essay is one of the most powerful I’ve ever read. He spends more time explaining “why” the world is the way it is today, and doesn’t wade into the territory of “OK, so what do we do about it?” Those are thornier issues to discuss, and perhaps the first step in addressing them is the acceptance that they’re happening to begin with.
If I had to boil down the essay (which is unfair, because it is very economical in its language already), my big takeaway is that as the 21st century unfolds with the power of the Internet at scale through mobile devices and the proliferation of technology and computing power into every industry, it calls into question The Coase Theorem which, for decades, defined why larger corporations existed — to manage complex transactional costs. Today, based on this essay, one could argue The Graham Theorem is now that networks of smaller companies render Coase obsolete. A step further, these smaller networks of companies (like that come out of YC) leverage technologies (through instruments like APIs) and can be run by smaller numbers of people, yet will likely accrue financial leverage as a result of the ratio of human:computer labor needed to manage and execute those transaction costs. Computers now make it cheaper, faster, and more efficient.
(As an aside, I’m sure there are other factors to consider in the argument that were not discussed. It is his essay and point of view. I am sure land issues could be another factor that drives inequality, or complex issues around socioeconomic status, race, gender, as well as access to educational resources.)
I do mean to imply there aren’t other factor at play, but to me, the more interesting question posed by the essay is — “Let’s assume this is happening. Then, what?”
Graham stops short of suggesting “what.” I understand why. It is too much for this post. The first step is acceptance. Income inequality is happening, and it is (perhaps not entirely?) driven by the accelerating rate and power of technological proliferation.
If society does “accept” The Graham Theorem as the prevailing OS of society (replacing Coase), what should our collective response be? Here are some ideas that are cited, and likely we will need all of these and more:
1/ Education: “We need more access to better education.” Yet, many believe our higher education institutes have been raising tuition while failing to keep students on pace for changes in the workforce. Perhaps YC is one of the first examples of that — forgoing graduate school, for instance, to join an accelerator.
2/ Guaranteed Income: This has been an argument — to proactively set basic income levels for citizens — advanced most notably by USV’s Albert Wenger, and most recently by YC’s current President, Sam Altman. Albert has been writing about the intersection of these issues for many years now, and I believe is writing a book that will touch on the topic. You can read one of his posts (which links to a video talk) here.
3/ Taxation: Graham points out we could theoretically tax economically accretive behavior to slow the effects of The Graham Theorem and redistribute wealth, but if done too bluntly, those creators could move to another nation that has more favorable laws and would want to compete for that talent, just like companies are competing for talent today. (This also is connected to global immigration, see below.)
4/ Immigration Reform: This is a sad topic in America today for so many reasons, especially given what is happening in other parts of the world today and how so many of America’s great entrepreneurial stories are carried through by first-generation immigrants. Many have clearly argued for immediate reform, but that seems politically infeasible in a country where xenophobia feels on the rise and where more and more people are beginning to feel excluded from the pistons which drive today’s global economy: technology. (Earlier, Graham has argued on his blog for U.S. immigration reform, citing global competition for talent as a potentially zero-sum game.)
Graham ends his essay today with the following warning (italics and emphasis added):
I worry that if we don’t acknowledge this, we’re headed for trouble. If we think 20th century cohesion disappeared because of few policy tweaks, we’ll be deluded into thinking we can get it back (minus the bad parts, somehow) with a few countertweaks. And then we’ll waste our time trying to eliminate fragmentation, when we’d be better off thinking about how to mitigate its consequences.
It’s a strong statement by someone who is careful with their words: “we’re headed for trouble.” As a reader of Albert’s blog for many years, I’ve come to admire his academic-style and now policy work to advance the issue. He and I have disagreed on what will actually happen. I admire that he is using his power to advance the issue and writing a book which touches on the subject. I am not as optimistic (sadly), where I see the “trouble” being more pronounced, leading to real conflict, causing many people to feel excluded from the economy and from the means of production, and while I want essays like this and Albert’s book to have a positive impact on policy and legislation, the country’s politics and willingness to make hard choices upfront seems to be running on limited reserves. That is my own personal takeaway from reflecting on Graham’s excellent post.
A few days ago, I wrote an opinion post on my blog, based on my point of view on what I’ve read and my experiences working in India, about the debate going on India currently between’s Facebook’s desire to push FreeBasics and the impassioned response (among many of the vocal majority) to oppose it. I knew when I was writing it and when I hit publish that many people wouldn’t like my POV, but my philosophy in writing publicly (for better or worse) is to think about my own POV and to share it without apologies, no matter the recourse.
The recourse in this case was a bit more than I had bargained for.
I received many Disqus comments and tweets lashing out at my POV. Some of them were too ad-hominem in nature to even entertain. Some of them had a strong but polite differing of opinion. I also received many private emails, which on one hand is great because I am grateful that people care to read what I write, but also a bit overwhelming as some of them were quite accusatory. That said, a few folks did write to me very thoughtfully and some engaged in conversation over email, which I greatly appreciate — I never write to prove that I’m right on a topic, I write to share the POV that’s inside my head, and I never claim for that POV to be correct.
In digesting all of the attacks and feedback, I wanted to clarify a bunch of things that are either related to me, to the original post, or to the issue in general — I realized in reading some of the comments that I likely didn’t do as careful a job in selecting or framing my language with disclaimers, and I underestimated (despite my local knowledge) how much of an emotional issue this is for many people.
So, in the spirit of continuous learning, of never assuming I’m always right, of being unafraid to clarify or admit an incorrect passage, and in the spirit of defending my own right to share a free POV (which folks can also choose not to read), I offer the following quick follow-up, in no particular order:
1/ I have spent real time working in India. With major universities. With the government. I have been all over the country. I may not be on the ground now or have been yesterday, but I got a lot of messages asserting I’ve never spent time there or know the country. I have also followed the issue at hand, despite people conflating their disagreement with me with evidence of my being misinformed.
2/ I do not work for Facebook. That was a comical assertion among a few. I am a Facebook fan, I own lots of Facebook stock (relative to my overall portfolio), I think it’s the best-run company in the world, and no matter how folks in India or other parts of the world get online, chances are good anyway a majority of them will end up on Facebook properties voluntarily.
3/ The focus of my argument was rural. I should’ve done a better job stating this upfront and multiple times. Yes, people will still disagree with that (which is fine). Naturally, city-dwellers in India of all socioeconomic levels will have access to new or used phones and be able to get online one way or another. I don’t have great confidence in the government’s ability to do the same for rural populations (which are over 600M+ in India), and cited some harsh historical facts to make the argument. Of course, people didn’t like those and saw them as patronizing — I love India and the people and would never say I am better than the country. No patronizing on my part or intent, and I used the term “License Raj” as a historical term applied to rural settings, but I think it was too hot-button to use at all. I should’ve stated the following, too: My preference, of course, would be for the country itself to bring these folks online, but I was just being honest in my POV that I don’t believe that will happen in a reasonable time frame.
4/ I did a poor job of not pointing out that I do personally believe that net neutrality is important. Of course, I do. Rather, I was making an argument out of being pragmatic, out of cutting a corner to accelerate access to wireless networks and the web. Of course, in a perfect world, people should be able to get online and not be restricted of where they surf or what apps they use (and pay for them in proper ways). I see the debate today as a way to kickstart (if even imperfectly) the onramp, and while the majority of responders (who disliked my post) disagreed, that was just my POV. Of course, in a perfect world, I would hope the Indian government and Indian telco’s got the rural folks online. That would be my hope, and again, for better or worse, my honest POV is one of deeper skepticism around that happening in a reasonable timeframe. Yes, I could be wrong, but that’s my POV. My hope wouldn’t be for Facebook or any other company to fill that void, but I do believe we will see more of this in other countries and, given Facebook’s execution prowess, I think they will succeed in cutting these types of deals in other places.
5/ Twitter isn’t a great Medium for conversation. It was much better to have emails sent to me calmly explaining what folks felt or read. I was able to digest and see where my language could’ve been misinterpreted. I appreciated the time those folks took to write to me privately. Thank you for that. On the flip, it was easy to just block and mute people who were attacking or conversing blindly on Twitter, but another lesson learned on the medium. I also got tons of messages of people I’ve never heard from in my life who said they were long-time readers of my blog, but only know felt compelled to reach out to me. I guess there’s no time like the current right now to introduce yourself.
Anyway, I learned a ton through the process, which is always my ultimate goal, and again, I am truly grateful for those few folks who wrote to me privately and shared their POV. Thank you.
It’s easy to think of Facebook as the world’s largest social network. It takes a bit more imagination to envision Facebook as the world’s dominant global nation-state, a new type state where citizens can connect and communicate across political borders and where the network’s CEO, who is only currently 31 years old, is on a march to be the world’s richest and most powerful businessperson by a long mile.
Zuck and Facebook have been able to tackle and master most challenges that’ve stood in there way. Today in India, the company and Internet.org want to use a mix of satellites and unmanned aerial vehicles to provide connectivity to India’s rural population. And, of course, there is a catch, but one worth exploring.
In a previous life, I worked on many projects all over India. For a while, I thought I would move there — I was born in the U.S., first-generation, and grew more and more fascinated with the idea of moving to India during and after graduate school. I don’t want this to come off the wrong way, as I love the country and all the potential, but I got burnt out by the business climate and found myself longing to get back to California.
It’s been a good while since I’ve spent cycles thinking about India at large, but today was a day that jogged many old memories. The background is: Facebook CEO Mark Zuckerberg and his team have devised, with Internet.org, a way to bring basic web communications and services to the rural poor in India, with the help of unmanned aerial vehicles, micro-satellites, and balloons. The catch is Facebook won’t provide these new users with full access to the entire “heavy” web of YouTube videos and bulky web pages — instead, he and Facebook will offer, in partnership with India’s Reliance, a zero-rated (e.g. free of data charges) service called “Free Basics” which will provide users with basic web and communication services such as email, chat, education portals, and so forth.
Zuckerberg is a savvy technocrat. With one billion users on his platforms today, he knows the two plum global markets to crack to grow Facebook are China and India. ‘Free Basics” is a digital olive branch meant to simultaneously connect hundreds of millions of poor and unconnected citizens across India’s great farmlands.
But, as I learned by catching up on all the news today, no good deed goes unpunished.
Activist groups in India are trying to block the deal. Their argument is (1) net neutrality must be protected on behalf of new digital population and (2) Free Basics restricts the web for the poor. Activists in opposition to Facebook’s deal believe giving away this audience to Facebook isn’t worth the long-term risk of giving aways keys to the digital kingdom to a California-based company that’s on a path to be the most powerful corporation in the world.
From the POV of Facebook and Internet.org, their remote data technologies would empower some of the world’s poorest people, in conjunction with Reliance for data, to harness the web for basic functions like learning, communication, photos, and so forth. Most recently, however, it seems like both the media and the regulators are having cold feet about giving Facebook these keys to their citizens. (You can read Zuck’s op-ed he placed in Indian newspaper here.)
The License Raj in India both provides protection for national industries but also presents a roadblock to national economic success. For instance, for many decades, China would leverage the unique tax and economic incentives with special economic zones (SEZs), but India’s attempt to copy them mainly resulted in property scams which marginalized the disenfranchised the poor rural landowner. Going back many decades to the time of India’s independence from The British Empire, U.S. forces and automakers tried to be first to market by offering to build highways and roads for the new country in exchange for the right to sell into these new open markets.
India refused these overtures from “the outside” in the past, a reaction most-likely fueled by a distaste for its own historical memory of colonial occupation. One could argue a host of reasons why India should have acted differently, but it’s worth keeping in mind India has only been truly independent since midway through the 20th Century. There is a deep-seated belief in India, after the Raj, that they themselves as a nation want to address their own problems. India prides itself on its democracy, but even that political system is not wholly their own — it was a parting gift from its previous rulers everyone accepts to be the best system of governance.
What we have today in India, of course, are networks of crappy roads, two-lane dangerous highways, and a government who doesn’t have the will to consider modern infrastructure projects. Will the state of India’s physical roads provide a harbinger of what to expect as the country gears up to have hundreds of million more citizens come online through all the new and reused mobile phones that will be hitting the market?
Given all this context, this is why the news about activist groups in India trying to stop or disrupt Facebook’s negotiations is so tragically comical. After Facebook built up a this service (“Basics”) and prepared to offer this suite of services for free in return for trying to hook the newest of the new potential users, dissenters began to question the impact of Free Basics as it relates to the Net Neutrality debate. To this end, you can read up about India’s possible nuking of this deal and read specifically the op-ed Zuck took out in an Indian newspaper today to make sure his arguments are heard.
In the end, paternalistic activists may end up blocking Facebook from its plans in the name of Net Neutrality, thus denying the over 600 million citizens who live in relative rural poverty the chance to escape the farm, the chance to leave the slums, and the chance to simply communicate with their families, which could by now be scattered across India or other parts of the world.
Personally, if activists in India block this, it will be a sad day for the country. If Facebook’s plans are thwarted, how will the Government of India step up to ensure these rural citizens have the devices, networks, and money to charge their phones and pay data rates in order to surf the neutral net they want to defende? The Government can say “no” to a new project, but would they have the resolve and passion to fund an alternative to universal web services access?
The lingering effects of the License Raj are crippling India when the country needs order the most. The cult of the License Raj drove India to mostly build its own roads and spur help from other outside forces. Today’s roads in India are an outdated relic of the past, and there’s no reason to believe tomorrow’s data networks will be any better.
I wonder if someone polled just 100m rural Indian citizens and asked them, if given the choice between (1) a basic smartphone where they could search Wikipedia, connect with other people, email, and talk on Facebook-related platforms and not have to pay for the data or (2) nothing, I have a sneaking suspicion at least 99m would opt for Choice #1.
Whatever happens here, the larger point is global corporations are the new data networks that society will be built upon, and in the case of Facebook, can provide critical infrastructure and access to a huge population at a much faster and efficient rate than government could. By contrast, India’s government, activist culture, and penchant for arguing nuance may end up losing the forest (a step toward universal access and lifting out of poverty) for the trees (long-term concerns around Net Neutrality).
When I post this, I know it will rile up some folks in India and who are ex-pats who sympathize with the protective benefits of The License Raj culture, but I feel quite confident having access to the web (even if limited to start) is a core human right and an essential ingredient to lifting anyone — in India or other rural places in third-world countries — into a new life.
In anticipation of the ethical challenges that would present themselves as a result of advancements in medicine, biology, and technology, the field of bioethics was born, an interdisciplinary field of study whose aim is to provide frameworks for making decisions in a world defined by increasingly advanced, complex technology. For example, how does society respond to the bioethical dilemma presented by cloning? History and humans have largely (so far) demonstrated there is a line they don’t want to see crossed.
Fast forward to this century, and of late, there’s been ample discussion of “Artificial Intelligence” (AI) lately. Over the past few months, major global technology companies from Amazon, Facebook, Microsoft, IBM, and even Apple have “open-sourced” elements of their technology stack to make them available for developers to freely contribute to and build on top of. And, most recently, we’ve seen the launch of OpenAI, a billion-dollar-plus nonprofit initiative with the aim of advancing AI to make its discoveries open as a check against the larger, aforementioned companies having a controlling monopoly on these technologies.
The topic of AI itself is massive, a life’s work only a few people with the proper, interdisciplinary training can even hope to master. I am not in that league, but I do observe how the term has been thrown social media. People now see and hear the term “AI” thrown into tweets, slide decks, email blurbs, press releases — the language of AI has taken on a life of its own. To make sure I understood the issues, I found it useful to read through resources like this, and what I was struck by was how multiple advances in seemingly unrelated technologies (such as drones and neural networks) could create a moment in time where AI, as a field of study, could cross the threshold from siloed experiments into integrated systems in the real world.
And, if we (1) look back at the field of bioethics and issues such as cloning, we start to see that humans have arisen to place parameters on what advancements in integrated technologies could afford; and, again, if we consider (2) the growing strength of public Internet companies such as Apple, Amazon, Facebook, Google, and more, it becomes easier to envision a world where these companies grow even bigger and stronger; where they extend their product lines deeper into mobile phones, drones, satellites, and other devices connected to the web; where they continue to accumulate rich, dynamic, never-seen-before and unreplicable data sets on our behaviors, intents, relationships; and corporations which, thanks to the glorious network effects of the Internet, be awash in cash profits for decades, to the point where they can afford to open-source some of their most core technological insights.
In a world where resources for AI and machine learning are open-sourced by the larger incumbents, the impending democratization of those technologies will likely lead to a situation where the most proprietary value lies less within AI, but more within the corresponding datasets the machines need to process information from in the first place. Building new products and services with open-source technology may help foster and accelerate innovation, but who will own or have access to those datasets? It’s a question I’ve been thinking about as we will likely see a whole new wave of entrepreneurs who try to harness these free services in the same way they did with platforms like iOS, Android, and the advent of cloud computing.
Seen through this lens, the moves by the big tech companies and the creation of OpenAI all make perfect sense. It may seem like a lot of money, but this is just the beginning. Machines are increasingly mobile, increasingly able to handle more tasks, increasingly able to more efficiently harness the power and flexibility of the chips and operating systems they sit on top of, and are increasingly lowering in BOM and operational costs. One of the world’s premier VC firms, which publicly discuss its investment thesis as one where “engaged networks of people can disrupt large markets,” has invested in a company in 2015 where the thesis is extended to a network of machines can not only take the place of people — the machine network can operate 24/7, learn with each new piece of data it collects, and become its own platform for other developers to build on top of.
I am less of a long-term thinker these days. I think about things that could happen 3-5 years out. Or, I try to. But based on a few investments I’ve made in the space, the increase in pitch meetings where these integrated technologies are brought to market, and the timing around all the larger companies open-sourcing some of their secrets, it strikes me that a world of intelligent machines — Computer Sapiens — may arrive much sooner than we collectively recognize. Already, machine learning products are improving interpersonal communications, sales and marketing automation, and many more, all along the way driving margins by lowering the need for human input and maintenance. Who owns and who has access to not only these technologies, but also the datasets that will drive them, will be a fascinating fault line to observe as the plate tectonics of AI shuffle over the next decade.
I am very proud the announce the first investment of Haystack III: OneConcern.
I met the founders through another friend at a fund, he was looking at the company and knew that I liked software plays that sold to national, state, and municipal governments. Most investors don’t like those sales channels, but I do. Why? Because I believe over time the budgets for certain things (health, emergency, climate) will balloon to meet societal needs while many others will fade and erode because we simply won’t have the money in the tax base to get it done. Those essential tasks then will have to be left to technology and software, and in my investing, I’ve found that once an entrepreneur figures out how to sell into governments and builds the right stuff, it is one of the best channels out there because words spread through different networks and it’s harder for a new entrant to cut in.
Anyway, I met the CEO at the request of my other investor friend, and I was immediately captivated by his personal story and academic background. The CEO, a structural engineer from Asia who came to Stanford to study the science behind earthquakes and other natural disasters. This is a tangent, but I enjoy studying the history of earthquakes and learning about how societies have dealt with them. I troll Wikipedia to give my brain a break and read up on these things, so when I met the CEO, I was actually excited to talk about big earthquakes and data, etc. What I came to understand from that meeting, however, was even deeper.
A few years ago, during the major floods in Pakistan, Ahmad (the CEO) was home visiting his family and was caught in the floods. He escaped to the attic of his family’s house and lived on or near the roof for over a week until he was rescued by authorities. I always ask a founder about how past experiences may shape future activities, but I never expected a machine learning engineer focused on building software to help states mitigate disaster response systems say that he himself was caught in a major natural disaster.
While I always try to spend time “in diligence” and vetting a company, I realize now in retrospect I probably spent too much time doing that with OneConcern. The beauty of investing at the seed stage is that I can work with tons of other investors to support companies who start out and have ambitions to grow bigger. Yet, much of the early stages — myself included — have become professionalized, often to the point of placing unrealistic expectations on new companies, new technologies, and new founders, when in fact it should just be about the identification of earnest talent and the relentless support of that talent. I may have conducted my proper diligence, but some things don’t need diligence; a product like OneConcern and an entrepreneurial story like Ahmad’s must be supported — it must be willed into the world, and just like I am trying to do with the creation of Haystack and my own family funds, it will be willed into world no matter what. The solution must exist, and the network of other investors will support it to see it through with their own sweat and passion. That is inspiring to watch unfold and be a part of, indeed.
Tomorrow is the second installment of The On Demand Conference, this one taking place in Manhattan. My co-conspirators Pascal from Checkr, Misha from Tradecraft, and the entire Tradecraft team have put together an incredible agenda, event, speaker lineup, and topic list. Sadly, I am not able to make this trip, but I can’t wait to hear about it from friends and colleagues who will be attending. If you haven’t already, check out the Line Up and all the great Agenda Topics that will be discussed.
The on-demand startup world has gone through some downs since the last conference. I’ve written about those here. In my conversations with Pascal and other investors about this, there’s no doubt that the bar goes higher and higher now for companies to earn venture investment. While the consumer demand for these services still remains, how that demand is fulfilled is now under question — and that’s a good thing.
In particular for New York City, with its own great startup scene, this is a good venue for this discussion given the competition and density. It will be interesting to see if one coast has figured out tricks the other coast can learn from, and vice versa. On a personal note, I will be sad to miss tonight’s smaller drinks event for the speakers and moderators, will miss hanging out with Shai, Steve, Matt, the Button folks, and many other friends I’d love to have seen, and I was really looking forward to opening tomorrow’s session in a fireside chat with Albert from USV, but Misha is stepping in and is also interested in many of the same issues touching the on-demand space. (In particular, make sure to read Albert’s post today about the connection between on-demand services, automation, and guaranteed basic income.)
Wishing everyone the best of luck with tonight and tomorrow’s big show, and a huge thanks to Pascal, Misha, for their support. They make this stuff happen with the greatest care and attention to detail.
As it relates to startups (and investing in them), the past week’s stock market correction (which still may be going) is just what the doctor ordered. Who knows why it happened exactly — sending a message to the Fed, international market fears, people realizing P/Es were too high, blah blah blah….
The net effect now after some stability is the correction was medicine everyone needed. More specifically, I think the correction and intense social & traditional media focus on it actually makes this better for everyone in the startup ecosystem:
First, writers, analysts, bloggers, and arm chair Twitter economists now have more to write about that timely, global, and more hard-nosed. They can go up to a founder or investor and simply ask “Well, did you crap your pants?” The press has been somewhat reluctant to balance cheerleading entrepreneurship with asking key fundamental questions.
Second, investors can now leverage recent market gyrations to negotiate down valuations. For years, investors couldn’t do this at the risk of losing a deal or offending a founder, but now everyone understands that a bit more balanced has been restored to the ecosystem, and investors (may) get some lower prices.
And, Third, founders avoided catastrophe. If the market kept sliding, many investors would’ve been fine (with bruised portfolio metrics), and writers/bloggers would’ve had a field day, but entrepreneurs, founders, and very early-stage employees (and frankly many rank and file) would’ve been in a real jam. Runways could’ve started to compress. People could’ve jumped ship to work at a safer job. This jolt was a nice reality check and doesn’t seem to affect the long-term positive outlook for technology seeping into the world.
For these three reasons, the recent market volatility may just have been exactly what the doctor ordered.